Time To Opt For Fixed Rate, BMO Says

Mortgage rates: Time to opt for fixed, not variable rate, BMO says By Susan Pigg | Fri Mar 23 2012

Fixed-rated mortgages now make more sense than variable, both as a way to keep costs in check and reduce worries about consumer-debt levels, says a report by BMO Capital markets.

“There are mounting signs that the tide is indeed turning for rates, especially with the U.S. economy finally getting back on its feet,” says the report entitled Time to say Goodbye . . . to Variable.

Government of Canada bond yields have jumped more than 50 basis points in the last three months alone, signalling that low interest rates may soon be on the rise as the U.S., and even the global economy, start to turn around, BMO notes.

Rising inflation and solid demand for commodities from emerging markets, coupled with global government debt, increase the risk that the Bank of Canada could start raising interest rates aggressively, the report says.

Related: Toronto housing market: Bidding wars are back

“Considering the likely upward trend in interest rates as the global recovery picks up speed in 2012, this may be one of those rare periods when a fixed rate turns out to be the superior choice.”

BMO is now offering a five-year fixed rate mortgage, under certain conditions, as low as 2.99 per cent over five years or 3.99 over 10 years. That compares to a variable rate of 3.10 per cent.

Mortgage broker Steve Garganis said he’s getting lots of calls from clients wanting to know if they should lock in, but warns the answer isn’t simple.

If they’re fortunate to have rates that at one point hit 2.25 per cent or less, he’s telling them to stick with variable since most five-year fixed are 3.19 at best, a meaning the payment on a $200,000 mortgage with a 25-year amortization would be $967 rather than $872.

But something needs to happen to cool the overheated housing market, especially in Toronto, Garganis notes, echoing the words of federal finance minister Jim Flaherty, who has repeatedly warned Canadians about the need to cut record levels of household debt.

Related: Why we chose a new house over resale

“I’m a bit concerned about the market,” says Garganis. “Multiple offers means the market is too hot, prices are too high. It’s a bit too hot for me.”

Flaherty stressed Thursday that banks shouldn’t be relying on Ottawa to further tighten mortgage lending rules and are free to act on their own. He said he wants to see the market “correct itself, if it can.”

“I find it a bit odd that some of the bank executives are taking the position that the minister of finance or the government somehow should tell them how to run their business,” Flaherty said at an event near Ottawa Thursday, according to Bloomberg.

BMO has been criticized for deeply discounting rates to 2.99 per cent for a five-year mortgage, further encouraging people to borrow who may not be able to afford to pay $1,164 a month on that $200,000 mortgage if rates climb back up to, say, 5 per cent.

But BMO deputy chief economist Doug Porter stressed that if Ottawa has concerns, “they have the means at their disposal to change interest rates — they have control over the most important interest rate out there, the Bank of Canada overnight rate.”

Locking in to a fixed-rate mortgage would go a long way to reduce concerns that homebuyers could be at risk if interest rates start rising.

Related: Is home ownership really a smart investment

“I would make the argument that locking in a mortgage for five or 10 years, with a 25-year amortization, would alleviate concerns and strengthen consumer finances.”