Taking out a mortgage is by no means a one-size-fits-all process. Regardless of your loan amount, you always have a say in which repayment route you take. Though you may be familiar with the fixed-rate and variable-rate dichotomy, there are other lending options that may be better suited to your financial preferences.
A hybrid mortgage offers a customized approach to the accumulation of interest on your mortgage. Offering the best of both worlds for those who would rather not face the risks associated with collecting interest under one rate structure, a hybrid mortgage allows access to both fixed and variable rates. But it’s best to see this mortgage type from all angles before you borrow.
The pros and cons of a hybrid mortgage
Hybrid mortgages can offer many perks, including the liberty to divide your loan into two or more portions — each with their own rate, term, and payment schedule. For example, you may decide to put 60% of your loan in a fixed rate structure, while the remaining 40% collects interest in a variable rate. Dividing your mortgage this way, ideally, means never having to bear the full weight of the market’s rate fluctuations while benefiting from the stability of a fixed rate. You can also often spread out your payments rather than having them fall on the same date, while providing more flexibility for a co-borrower’s financial bandwidth.
“A hybrid mortgage is a good option when you have two borrowers with different risk tolerances or outlooks on interest rates,” says Sung Lee, director of sales and underwriting at intelliMortgage and RATESDOTCA mortgage expert.
However, these advantages can come at a cost. Since your mortgage may be divided into different terms, you may not be able to switch lenders without breaking your mortgage early and facing a penalty — even if part of your term has ended. And because hybrid mortgages are registered as a collateral, they have to be refinanced if you switch lenders, which can include appraisal, title insurance, and legal fees. This differs from a conventional mortgage, which can be transferred to a new lender without refinancing.
Could a hybrid mortgage be a safeguard against rising interest rates?
The Bank of Canada embarked on its first 50-basis-point rate hike in April, and has hinted that a hike of the same size is on the table for the next overnight interest rate announcement in June.
In this environment, a hybrid lending option might be enticing, providing borrowers with more flexibility and lowering the impact that a variable interest rate, alone will have on their mortgage payments.
According to Karen Yolevski, chief operating officer of Royal LePage Real Estate Services Ltd., housing prices have also been on an upwards trend over the past five years, with a substantial amount of appreciation occurring during the pandemic years.
“If we look at the GTA in Q1 of 2017 as our leading indicator, the aggregate median price point of a home was $759,200, and in Q1 of 2022, we’ve seen quite a dramatic increase,” says Yolevski. “We’re now sitting at $1,269,900.”
Sale prices for Canadian homes, while starting to cool, are only projected to remain high. This can lead to a longer amortization period when paying off your mortgage and put further pressure on the amount of interest accumulated on your loan.
Therefore, having one portion of your mortgage accumulating interest at a lower rate than the other could offset higher interest that may result from both the current housing market and rising rates.
Homebuyers benefited from drastically lower mortgage rates during the peak years of the pandemic. However, recent rate hikes indicate it may be time for homebuyers and homeowners alike to compare mortgage rates and rethink their borrowing options.
Is a hybrid mortgage right for you?
Whether you’re a first-time homebuyer or looking to refinance, a hybrid mortgage can be a good option if you want a relatively steady mortgage payment with the opportunity to benefit from lower interest rates if they’re available.
“A hybrid mortgage is ideal for someone who is on the fence and simply cannot decide whether to go fixed or variable,” says Lee. “It takes the guess work out of the equation and diversifies your interest rate exposure.”
However, according to Lee, a hybrid mortgage can be particularly beneficial if you’re on a limited budget today but expect your income to grow in the near term. In this case, you could explore other hybrid options and put 50% of your loan in a mortgage and 50% in a home equity line of credit (HELOC).
“50% would be a regular mortgage payment while the other 50% would be interest-only payments, allowing you to keep your payments low,” says Lee. “Once your pay increases, you can convert that HELOC balance into a mortgage payment.”
If you are refinancing, it’s important to keep in mind the number of years remaining in your term, as the market might not change enough to see any financial benefit after the refinance fees.
Regardless of which rate structure you choose, it’s always important to consider your budget, payment schedule, and the Bank of Canada’s projected rates to maintain the most affordable mortgage possible.
Compare Mortgage Rates
Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.