Jonathan Ratner, Financial Post Published: Thursday, October 22, 2009
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While history has shown that variable mortgage rates save borrowers more money, the anticipated upward trend in interest rates as the economy emerges from recession could make this one of the rare periods when a fixed rate turns out to be the superior choice, a new report says.
Inflation may not have been a problem in Canada since the early 1990s, but there is an outside risk that inflation flares up amid record government deficits and as global central banks keep "the pedal to the policy metal," says a new report BMO Capital Markets. The inflation risk becomes even more prominent if the global economic recovery turns out to be stronger than expected.
This could force the Bank of Canada to aggressively raise interest rates, driving variable mortgage rates higher, but leaving fixed rate choosers unscathed.
"Another reason fixed rates are attractive in the current environment is that short-term rates are already as low as they can go -- rates are only going to move higher from here as the economy recovers," said BMO economists Douglas Porter and Benjamin Reitzes.
Fixed rates were advantageous during only two recent periods -- through the late 1970s and briefly in the late 1980s. In both cases, this was ahead of a period of rising interest rates, as is the case now, the economists added.
For those with limited financial flexibility who could run into problems if there was a pronounced upswing in interest rates, such as your average first-time home buyer, the moderate extra cost for the peace of mind a fixed rate mortgage provides may be worth it.
On the flipside, the case for variable rate mortgages is driven by an inflation outlook that remains benign as the soaring Canadian dollar puts downward pressure on prices. As a result, it looks like the Central Bank may follow through on its commitment to hold rates steady through June 2010.
There is also the possibility that fixed rates fall even further if the economy performs worse than anticipated.
Read more: http://www.nationalpost.com/news/story.html?id=2133046#ixzz0UmpgE2LO
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