BMO Puts More Weight Behind Fixed Rates

BMOBMO issued a release yesterday reiterating how variable-rate mortgages have outperformed fixed mortgages 82% of the time in the last 30 years. 

BMO then went on to suggest that we may be in one of those infrequent periods where a fixed rate could win out. It said:

  • “Canada has been in a long-term declining rate environment since the early 1980s.”
  • “The Bank of Canada's overnight rate is now as low as it can go, so there is no further downside for variable rates. The surprises can only be to the high side from here.”
  • “Fixed rates were advantageous during only two recent periods – through the late 1970s and in the late 1980s; in both cases ahead of a period of rising interest rates, as is the case now.”

Fixed-Variable-MortgagesAfter qualifying its position with the risks of going fixed, BMO ends by saying, “BMO Economics' view is that variable rates will climb only moderately, but by enough to tilt the balance in favour of current fixed rates.”

So it appears BMO’s scale has now tipped to the other side because its October rate analysis gave the edge to variable mortgage rates.

This is an interesting shift by a major player.

  1. Its hilarious reading the Banks experts giving their predictions. They are invariably wrong and every time someone suggests fixed rates are better because inflation is coming and rates are ‘bound’ to go higher – they are proved dead wrong just a few weeks/months later. There is nothing to suggest that rates are going to rise anytime soon. World economies are still at rock bottom and showing precious little signs of any recovery. Its going to be a long slow process getting out of this recession. Until jobs are not being lost on a daily basis, I doubt there is any chance of any rate rises in Canada or the US.

  2. Fixed 4% over 5 years is incredible cost certainty. I believe variable rates are around prime right now…
    Are those the apples they are comparing, if so, then I agree with BMO.
    In my situation, I am in a closed variable at 4.4% My rate is prime – 0.85% I am effectively killing my mortgage right now. I would say the shift is not advantageous for my situation.
    My plan is to ride out this excellent rate. The hope (perhaps based on reading what I want to read) is the BoC rate will stay low for most of the year, so even if rates start going up in Sept, and I am forced to lock in at something like 5.5% (or greater) my effective rate over the term will be lower because I have enjoyed this rate for 1 year already, and will continue to do so.
    Great Site, love the commentary too!

  3. I think Paulo meant to say he’s at 1.4% (not 4.4%)!
    Anyway I think it’s ironic that BMO recommended variables in October, when the variable rate was around 2.25%, and now that variable rates are around 2.00%, they are recommending fixed rates.

  4. I’m interested in getting licensed as a mortgage broker but I am unsure if many places are hiring right now(in Victoria BC). I’m sure there are many brokers that read these posts and was wondering if any of you had any helpful info! For example, what can be expected as a starting wage?(I have a bachelor of arts degree in psychology as well).

  5. Given today’s reports that the recovery will be slow, for budgeting purposes, would it be conservative to predict that variable rates will rise by .5% every year for the next 10 years? If so, a variable rate would seem to be much more advantagous than a fixed rate, assuming that fixed rates are around 7% in years from now. In this scenario, on a mortgage of $450K, the variable would save an average of $210 less per month for the first 5 years and $500 per month for the 2nd 5 years. Not a small difference!

  6. Barrista, your logic is flawed because when rates rise, it will be more than just 0.5% a year! That would imply the Bank of Canada is only going to raise by 0.25% at two out of its eight annual meetings – not the pace they’ve historically hiked at.
    I think assuming a 1% hike every year is more safe (but not for the next 10 years!)

  7. Dan, thanks for the reply. I agree that rates will rise faster than .5% year, but they will also go down, of course, over the 10 year period. So, would the periodic declines, when variable is significantly lower than fixed, not compensate for the time when rates rise fast? The downside to variable seems minimal, especially with access to a HELOC to cover any cash flow problem if rates rise very high. Historically, spikes in the variable rate seem relatively brief (not more than 2 years). So, in the long run, variable seems like the better bet, even in these times.

  8. Central banks usually increase rates faster than they drop them. The B-of-C cut rates 4.25% in a year and a half. They will certainly raise them at least half that much and probably in a similar timeframe.

  9. I cringe when I hear the banks recommending fixed mortgages. It’s like McDonalds issuing a statement that this may just be the right time to buy hamburgers! With Canadians conservative by nature, the fixed mortgage must be the biggest cash cow for the big banks. Their consistently huge profits tell me that they will always be charging too much for this “insurance” against rising rates, regardless of where we are in the econimic cycle.

  10. Not true. If anything, banks are charging less than they ever have for “this insurance.” Look at a 5 year rate minus bonds today, and then compare it to 5 years ago.

  11. rates have been going lower for 20 years now. What makes the bank experts think that suddenly they will start to go higher?? Its like the people that call the end of the Bull market in Gold and Commodities – simply because its been a Bull market for 10 years. Crazy!
    They simply CANNOT raise rates until the economy is in a MUCH stronger position. We’re quite likely to enter a double dip recession – stockmarket performance in January pretty much forecasts this. And if we do, the LAST thing the Bank of Canada will want to do is snuff out the one sector that has done well – real estate – by raising rates at an inopportune time.

  12. Barrista, you’re forgetting a key point – variables historically were at prime – 0.8% or so.
    Now they’re at prime!
    Not only that, but prime is at Bank of Canada rate plus 2%, when until a year ago it was Bank of Canada rate plus 1.75%! Does nobody remember how the Big Six Banks didn’t pass on one of the rate cuts last winter?
    So in reality, variables are costing us 1.05% more than they should … they should be at 1.20% now, not 2.25%. That’s why historical records showing that variable rates were better (which I agree with) are not a good indicator for today’s environment.

  13. If you want to give banks more of your hard earned dollars (like you don’t give them enough already?) go fixed! Of course BMO is advocating fixed… they want more people to pay 4% rather than 2.25%! More money for them and they know that most of the public is naive about their finances. Why do you think so many people sign their mortgage renewal mailer on the dotted line and send it back to them?
    Take variable, pay at higher rate and get that principle down. Don’t give the banks the satisfaction or extra $.

  14. @Dan, Variables were only at prime – 0.80% for a relatively short time. Over the long term they have been closer to prime.
    @Brock, If rates rise like they have after past severe receessions, fixed mortgages could easily cost less over five years. Research shows that variables win most of the time, but not ALL of the time.

  15. Branchguy, if the majority of Canadians went variable, I might believe that the banks are not making much money on fixed products. As this is clearly not the case, and banks are obviously doing very well, what other explanation can there be? Do they have another revenue stream that is even more profitable than fixed term mortgages?

  16. Barrista: Yes, they have many other revenue streams that are more profitable than fixed-term mortgages. For example, wholesale banking. Or commercial banking. Or asset management. Or advisory services. Etc …

  17. It’s not always about obtaining the absolute lowest rate. It’s not about which products are most profitable to the bank. It’s about obtaining the type of mortgage that suits your finances, your lifestyle, your family, your comfort zone, and so on. Not all people have the knowledge or the inclination to “rate watch” to ensure they lock in at the right time. Many so called rate watchers don’t even realize the bond market can affect mortgage rates. Different people have different needs. One size does not fit all.

  18. Interesting how professionals view the debate as almost a foregone conclusion in favor of variable. Overwhleming majority of buyers/renewers are voting by signing fixed. Clearly there are pros/cons in favor of Fixed (as there are many in favor of variable) but it is the FEAR factor. Buyers seem to be saying “I can stomach paying more as trade for not worrying for next five years”

  19. The number one money maker for the banks is the insurance that they provide… #1 and they push the sale of that product hard.

  20. Historically speaking, banks always offer what will make them more money. If they want you to go fixed, go variable. If they want you to go variable, go fixed.
    I don’t remember seeing a bank that ever had my interests at heart over theirs.
    Just my humble opinion.

  21. @ Patrick – Banks are certainly there to make as much money as they possibly can, but the problem with your statement is that it presupposes that banks can accurately predict future interest rates. And if they could do that, they wouldn’t need anyone to take out mortgages at all.
    Al R

  22. Al,
    You couldn’t be more right about the banks’ rate forecasting ability. Of course, they do make profitability forecasts based on what interest rate spreads they’re able to currently lock in. I’ve also heard capital markets people say the BoC telegraphs rate changes to banks on a near-term basis. But I don’t think that’s behind this BMO report.
    For BMO to switch their opinion to fixed rates is interesting. In addition to wanting to make money, they don’t want to be wrong.
    I think there’s less of a conspiracy theory than many might think. RBC, for example, has supported the benefits of variable rates for a long time, even throughout the big drop in rates (a time when when the layperson would expect them to make more money in fixed rates.)

  23. Is anyone forgetting that the banks increased their spread from the Bank of Canada rate to their prime rate, by .25 so that when they offer you variable at around
    .20 below prime is technically a lie.?

  24. So if you’re a first time home buyer who isn’t familiar with the economy and prime rate trends/history…would you ride out a 3 year variable at 2.00% or go with a 5 year fixed at 3.74%? What do you think the prime rate will be in January 2013, if you had to predict? Do you think banks will be offering prime -0.50 (or better) rates at that point in time?
    I know this is all hypothetical, but I’d appreciate anyone’s opinion (especially Al’s)…I have to decide on a mortgage this week! Thanks.

  25. MK you should really talk to a mortgage professional and have them do the proper amortization analysis. Random rate prognostications won’t help you.

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