What Is a Hybrid Mortgage?
Finding the right mortgage for your new home purchase can save you thousands of dollars in interest. There are many types of mortgages available, including fixed and variable interest rates, that give you the flexibility to choose the right solution for your needs. But did you know there’s an option to mix the two, giving you what’s called a hybrid mortgage?
A hybrid mortgage combines both fixed and variable interest rates, usually splitting your mortgage amount 50/50 between the two. For example, if your mortgage amount is $400,000, $200,000 will be applied to a fixed-rate term, with the other $200,000 to the variable rate term.
This type of mortgage is ideal for those who want to take advantage of variable rates, as they can be lower than fixed, but also want less risk in the possibility of fluctuating interest rates. The fixed portion acts as a cushion against rising rates.
Advantages of a Hybrid Mortgage
Since a portion of the mortgage is set to a fixed rate, you as the homeowner is better able to work within a budget for payment amounts. Only a portion of the mortgage is variable, so there is less fluctuation in the mortgage payment.
This is a good solution for those who want to take advantage of the lower interest rates variable mortgages offer, but still have some form of predictability in terms of a monthly payment.
Both fixed and variable portions of the mortgage are on different terms, so you have more flexibility in timing your renewals. For example, you can have your fixed portion on a five-year term, while having the variable on a one-year term. This allows you, after one year, to reassess the variable portion of your mortgage and make decisions on whether to change your mortgage or continue on the same terms.
Having this much control over your mortgage gives you the decision-making power to pay your mortgage off sooner. With two segments of your mortgage on two different terms, you have more options for payment and amortization schedules.
Lenders can offer initial fixed teaser rates, which are typically lower than standard fixed rates. In addition, when your fixed-rate term expires, the interest rate at which your lender can renew the mortgage is capped. This means not only will you benefit from lower mortgage payments to start, but when it comes time to renew you won’t be faced with large interest rate increases.
Disadvantages of a Hybrid Mortgage
Despite the flexibility of a hybrid mortgage, it’s rare for interest rates to be any more competitive than completely fixed or variable mortgages. The introductory rate lenders offer can easily be cancelled out by the fluctuating variable rate portion of your mortgage.
If the two parts of your hybrid mortgage are on different amortization schedules, it can be very difficult to shop out the mortgage when it comes time for renewal. You may find that to move to a new lender, one portion of your mortgage may be subject to penalties for early termination. It’s usually better to set both parts of your mortgage on the same term to avoid this potential headache.
The variable portion of your mortgage can create instability in your mortgage payments. As with a standard variable mortgage, the rates are flexible and are based on current market trends. When the market heats up, you may find your payments reaching heights you weren’t expecting. This could potentially affect the interest savings you had expected.
Hybrid mortgages must be refinanced at the time of renewal, which typically comes with additional fees. This could cut into the savings you incurred during the term of your mortgage.
A hybrid mortgage is a more complicated product to consider but depending on your specific needs it may be the right choice for you. Benefits include the potential for interest savings, flexibility in payments and amortization schedules, and the savings of a variable mortgage mixed with the reduced risk of fixed rates.
If you weigh your options carefully before choosing this type of mortgage, you’ll be sure to choose a solution that saves you money and helps build your financial future. Speak to one of our Area Managers today to find out how a hybrid mortgage could work for your new home purchase.
Photo credits: depositphotos.com
About the Author:
At Sterling Homes, our mission is to provide the opportunity for affordable homeownership without compromise. Over the last 70 years, Sterling Edmonton has quickly become one of Edmonton’s most popular builders. We bring more than seven decades worth of exceptional customer service, superior design and unparalleled craftsmanship to the greater Edmonton area. As a member of the Qualico Group, Sterling Homes focuses on greater Edmonton’s finest family communities, while being able to offer some of the region’s most family friendly prices thanks to volume purchasing power for materials, trades and land. This has not only made Sterling one of Edmonton’s bestselling, move-up builders, but also one of the industry’s most respected home providers.
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