While variable-rate mortgages continue to beat out fixed-rates when it comes to cost savings, the gap between the two is likely to become closer due to the economic environment, a new bank report says.

“Fixed rates were advantageous during only two recent periods – through the late 1970s and briefly in the late 1980s; in both cases, ahead of a period of rising interest rates, as is the case now,” the report by BMO economists Douglas Porter and Benjamin Reitzes said.

Variable rate products have proven the better option 82 per cent of the time since 1975, Porter and Reitzes wrote, and forecast that variables will continue to remain cheaper than fixed rate mortgages. This is in part due to the rising Canadian dollar, which has reduced the Bank of Canada’s short-term need to raise the key interest rate.

On the other side, the report argued the economic recovery – and the expected rise in interest rates next year – has potentially caused “one of those rare periods when a fixed rate turns out to be the superior choice.” It also pointed out that negotiated rates (as opposed to posted rates) make fixed and variable products closer to call.

Source: http://www.mortgagebrokernews.ca/news/38117/details.aspx
Monday, 26 October 2009