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A hybrid mortgage (a.k.a. “combination” or “50/50” mortgage) is part fixed and part variable. Or sometimes it is part long-term fixed rate and part short-term fixed rate. A hybrid mortgage allows a borrower to enjoy the stability of a fixed rate, while taking advantage of potential rate savings on the variable portion.
The Hybrid Mortgage
No one can consistently predict interest rates. People choose hybrids because they want to diversify their interest rate risk, just like they diversify their investments. In today’s interest rate environment, where rates have as much chance of going up versus down, hybrids make good sense for many borrowers.
Hybrids have a few disadvantages, however:
- Your interest costs can rise on the variable-rate portion, if rates rocket higher.
- Unlike a standard mortgage, most hybrid mortgages cannot be switched to a new lender without legal and/or appraisal fees.
- If you mix long and short terms in a closed hybrid mortgage, it can cost you when the shorter term renews. For example, if you have a 1-year fixed and a 5-year fixed, the lender might not be highly competitive when the shorter 1-year portion matures. That’s because the lender knows you have to pay a penalty to break the longer-term segment, so it may not give you its best rates on new shorter-term portions. If you choose a 5-year fixed and a 5-year variable, however, you don’t need to worry about this.
- Hybrids are harder to get approved for if you have above-average debt ratios. That’s because most lenders require anyone with a variable rate to prove they can afford payments at the posted 5-year fixed rate—in case rates soar.
Here are a few more tidbits about this particular term:
- About 1 in 17 borrowers choose hybrid mortgages (source: Mortgage Professionals Canada).
- Some lenders pay your legal and appraisal fees when you switch into a hybrid mortgage.
- Most hybrids are collateral charges, which means you usually have to pay legal and/or appraisal fees to change lenders.
- The variable-rate component of a hybrid mortgage can have two types of payments, depending on the lender:
- Floating payments: This is where your payments increase and decrease based on a benchmark of some sort (most commonly prime rate).
- Fixed payments: This is where the lender keeps your payment the same for the entire term. If prime rate goes up, you pay more interest and less principal, and vice versa. In most cases, your payment must at least cover the interest due—or the lender will raise the payment.