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When it is time to renew a mortgage, you are often faced with a difficult problem: should you go for a fixed rate or variable rate mortgage?

Image: Lumaxart / Scott Maxwell / Flickr

There are benefits to both. However, historically it has been the variable rate mortgages that have the edge: in the last 30 years, variable rate mortgages have outperformed fixed rate mortgages in terms of cost-effectiveness. Generally, it has been the advice of most mortgage experts to choose a variable rate mortgage. And up recently, that was the view of most of the banks.

However, on Monday, the Bank of Montreal released a report that seems to suggest that now is the time to choose a fixed rate mortgage. There are three points that support this view.

1. In the overall long-term, rates have been falling since the beginning of the 80’s.
2. We have never had an overnight rate as low as this, and it cannot go any lower. The only place the rate can go is up.
3. Although variable rates have generally been a better choice for most of the last 30 years, there have been two exceptions: the late 70s and 80s. The reason? Both of these were times of low interest rates ahead of rising rates.

We don’t know if inflation will rise in the near future, but there is a distinct possibility it will. And with rising inflation comes rising interest rates. The Deputy Chief Economist of BMO Capital Markets says, “Short-term rates are at historic lows and pressure is likely to build for higher rates in the year ahead.” Although the risk of a return to the extreme double-digit interest rates of the early 80s is low, the length of this current low interest rate period is unprecedented, and a big correction may occur.

The Bank of Montreal does provide some caveats. Interest rates are tied to the economy. If the economy continues to falter, fixed rates could fall even further. And of course, the choice of interest rates depends on the circumstances of the individual.

But if you are buying or renewing, giving a fixed rate mortgage another look may be worth your while, and in the long run, could save you a lot of money.

Nelson Goulart
Broker of Record with Signature Service GMAC Real Estate
www.ssgmac.ca