Posted onJuly 05/2019
Despite the benefits of hybrid mortgages, only four percent of Canadians choose them. This could be because the lender doesn’t mention them in their recommendations, or because they seem a bit too complex for the borrower.
What is a hybrid mortgage?
Before taking a look at whether a hybrid mortgage suits your circumstances, let’s define a hybrid mortgage. A hybrid mortgage is a mortgage that is split into a number of financial components. Every component of the hybrid product has different rates, term lengths, and rate types.
This kind of product enables the borrower to benefit from a number of different things. For example, the borrower can take advantage of the low rates on offer with a variable rate mortgage, while benefiting from the stability of a fixed rate mortgage.
With the fixed component, the borrower has some protection from the impact of rising rates. With the variable rate component, the borrower can take advantage of the lower rate with the variable rate component. If the prime rate goes up, the borrower is, as mentioned, partially insulated from the impact because of the fixed rate component.
The most popular type of hybrid mortgage is the 50/50 mortgage. This is where half your mortgage in a variable rate and half is at a fixed rate. With some hybrid products, a lender will even let you mix the terms and contract length as well.
Is a hybrid mortgage right for me?
Hybrid mortgages are usually suitable for borrowers who:
Hybrids are often misunderstood. They're also insufficiently promoted, entail more closing costs and often have uncompetitive rates. But not always.
- Anticipate rates will remain low but wouldn’t be comfortable with rates increasing
- Want a low penalty if the mortgage is broken early
- Have a partner with a different style of risk tolerance
- Can’t decide between a fixed and variable rate
If you fit any of the profile points above, then you should consider inquiring about a hybrid mortgage. However, remember that this kind of product is more expensive when renewal time comes around. They must be refinanced, which frequently requires legal consultation, thereby adding to the cost.
This disadvantage is most applicable to folks with smaller loan sizes. If your mortgage is $200,000 or more, those refinance costs equate to a rate premium of less than one-tenth of a percentage point on a five-year mortgage. That's very little for the diversification benefits of a hybrid rate, especially if you can find a lender or broker to cover those refinancing costs.
Virtually no one on Earth can consistently predict interest rates. No banker, no broker, no economist, no Bank of Canada governor, not even money managers paid millions. But with hybrid mortgages, timing matters less. They take the guesswork out of rate picking.
Granted, if you're a well-qualified, risk-tolerant, financially secure borrower, you're often better off in the lowest-cost standard mortgage you can find, and there's historical research to back that up. But if your budget has less breathing room or rate fluctuations make you slightly queasy, hybrids are worth a look.
To learn more about hybrid mortgages, call Northwood Mortgages at 888-495-4825 or contact us here.