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20091026

Should I get a variable rate mortgage or should I get a fixed rate mortgage?

Fixed mortgage rates may help you feel secure in your budgeting, but the Bank of Montreal says the more volatile variable rate mortgages will save you money in the long run. An adjustable rate mortgage is a home loan that has either a variable interest rate on the loan or the number of loan payments can vary depending on current market conditions.The most common ARM is one where the interest rate varies with market conditions. The interest rate is tied to some market rate index IE Prime Rate (in other countries like US it could be tied to the six-month Treasury securities interest rate, six-month Certificates of Deposit or some other index. At the time of the loan, the lender would indicate what market instrument directs the variability of the loan.) As the interest rate increases, so does the required mortgage payment.

Over the past 30 years, variable-rate mortgages have been more cost-effective about 82 per cent of the time. BMO said the Bank of Canada's overnight lending rate is at its lowest possible point now, which could mean there are fewer benefits to a variable rate in the foreseeable future.

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