November 22, 2019

Long-term mortgages a smart bet

By Scott Larson, The StarPhoenix

Historically, homeowners have been better off when taking out a mortgage by opting for a variable rate as opposed to a fixed rate.

But a new BMO Capital Markets report says long-term fixed rates are so low they are now the better bet.

“Fully 84 per cent of the time since 1975, the cost-effective route for borrowers was to stay variable. But, recent rate competition has all but erased the spread between five-year fixed mortgage rates and variable rates,” said the report, put together by BMO’s deputy chief economist Douglas Porter and senior economist Benjamin Reitzes.

“While we have in the past supported going variable, and even though short-term rates are likely to remain low this year, current offers on long-term mortgage rates and the recent shift in bond market sentiment tilt the balance heavily in favour of locking in at this stage – fixed now clearly trumps variable.”

BMO is offering five-year fixed terms at 2.99 per cent and 10-year fixed rates at 3.99 per cent.

The report said the bond market is sending “loud warning signals that the era of low interest rates may finally be drawing to a close – Government of Canada five-year bond yields have jumped more than 50 basis points in the past three months alone on an improving outlook for the global economy and an ebbing in the European debt crisis. As bond yields rise, the cost of funds for lenders also rises, ultimately putting upward pressure on consumer and business borrowing costs, including longer term mortgage rates. So, even if variable rates take some time to climb, we may not see such low fixed rates again any time soon.”

The spread between variable and fixed rate has closed significantly and that makes fixed rates attractive, said Laura Parsons, BMO area manager of mortgage sales in Calgary.

“This is the lowest rate since the ’50s,” she said. “I’ve been lending for 27 years – from 21 per cent (rates) to 2.99 is quite a long stretch.”

BMO’s interest rate outlook projects a significant advantage to locking in at current five-year (and perhaps 10-year) rates. Combined with a shorter, 25-year amortization period, such a step would significantly dampen widespread concerns about the vulnerability of household finances, the report said.

Parsons said, for example, with a $400,000 mortgage with an interest rate of five per cent, one would save $70,000 in interest if they went to a 25-year amortization from a 30-year term.

“People will get out of their mortgage faster and pay less interest,” she said.

Most first-time home buyers only know of mortgage rates in the low single digits. But there’s no guarantee it will stay this low.

“I think we don’t know what a good interest rate is anymore,” Parsons said.

“Taking a 10-year term at 3.99 (per cent), no one has a crystal ball, but I think you can feel pretty comfortable things aren’t going to change.”

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