News Releases

TORONTO, ONTARIO--(Marketwire - June 2, 2011) - With interest rates hovering at historically low levels, a growing number of people are looking to purchase a home. Every homebuyer faces the age-old question of whether to choose a fixed or variable rate mortgage.

"The question of whether to lock in to a longer-term fixed mortgage rate or stay in a variable rate has become an increasingly complex and important debate," said Doug Porter, Deputy Chief Economist, BMO Capital Markets. "Short-term rates are close to historic lows and pressure is likely to build for higher rates later in the year ahead.

"Although inflation hasn't been a significant problem since 1991, there is a risk of a flare-up due to rising gasoline prices," said Porter. "The Bank of Canada has signalled it may increase interest rates later this year, driving variable mortgage rates higher, but leaving fixed rates relatively unscathed."

The decision depends on the individual. For those who do not have a lot of financial flexibility - such as first-time home buyers and those who would run into difficulty from an upswing in interest rates - the moderate extra cost of peace of mind you can get from a fixed rate may be a price worth paying.

Katie Archdekin, Head of Mortgage Products, BMO Bank of Montreal, suggests Canadians stress-test their mortgage in advance to make sure any potential increase in interest rates are manageable. "Currently, BMO Bank of Montreal offers a five-year fixed low rate mortgage to all Canadians at a current posted rate of 3.89 per cent. With a 25 year amortization, homeowners can save thousands of dollars in interest costs over the life of the mortgage," added Ms. Archdekin.

BMO offers the following tips for Canadians to help them become mortgage free faster:

• The shorter the life of the mortgage, the less you pay in interest.
• Become mortgage free faster and begin saving more for retirement.

• Stress-test your budget using a mortgage payment based on a higher rate.
• Total housing costs (mortgage payments, property taxes, heating costs, etc.) should not consume more than one-third of household income.

• If you can provide a bigger down payment, it's a significant way of helping you pay less interest over the life of your mortgage.
• With a down payment of at least 20 per cent, you avoid paying mortgage default insurance.

• Pay weekly or bi-weekly instead of monthly.
• Increase your mortgage payment (principal and interest).

• While variable rate mortgages have been a winning strategy over the long term, fixed rate mortgages (currently at historic lows) provide the peace of mind of insulating you against rate increases and the certainty of knowing how much of your mortgage you will have paid down at the end of your term.