Fixed-rate mortgages are a better bet, BMO says

TORONTO — Longer-term fixed mortgage rates may soon be a better deal than variable rates for homebuyers, a new report by BMO Capital Markets says.

BMO chief economist Douglas Porter and senior economist Benjamin Reitzes write that historically, choosing a variable mortgage rate has been more “cost-effective” than locking in on a five-year fixed rate, but this may no longer be the case as signs of an improving economy continue.

It’s been long anticipated that both the Bank of Canada and the U.S. Federal Reserve will move to hike interest rates in 2015.

“True, it may have seemed that markets and economists have played the role of The Little Boy Who Cried Wolf on higher interest rates in recent years,” the report, released Thursday, says.

“But there are emerging signs that the tide is finally turning for rates, especially with the U.S. economy poised to accelerate. The bond market has sent out loud warning signals over the past year that the era of low interest rates may finally be drawing to a close.”

Currently, a five-year fixed mortgage rate from one of the big Canadian banks hovers above three per cent, with variable rates ranging below that. As bond yields rise they will put pressure on borrowing costs and longterm mortgages, Porter and Reitzes say.

Most affected by potential hikes, they said, are those who are already stretched too thinly in the housing market, so locking in at a higher rate may help this group weather any drastic increases.

“For those who don’t have much financial flexibility and would run into difficulty from a pronounced upswing in interest rates (typically first-time homebuyers), any potential extra cost for peace of mind now appears to be a price well worth paying,” the report says.