Hybrid Mortgages – Good or Bad?

The Globe and Mail ran a couple of articles recently on hybrid mortgages in Canada so I thought I would weigh in on the subject. The first article they wrote last week spoke of the advantages of a hybrid mortgage and how it can help guard against rising interest rates. The article was quite short and did not go in to much detail on how the hybrid mortgage actually works. The Globe then followed up with a second article yesterday quoting a mortgage broker and talking about some of the pitfalls.

What is a Hybrid Mortgage?

So what is a Hybrid Mortgage and how does it work? A hybrid mortgage is basically the love child of a variable and fixed rate mortgage. The client can choose how much of their mortgage to set at a fixed rate and how much to allow to float at a variable rate. The logic behind this product is it will help protect you against rate increases with the fixed rate while still allowing you to enjoy some benefits if rates fall via the variable rate.

Is a Hybrid Mortgage right for you?

I have never found a situation where a hybrid mortgage product made sense for a client of mine……and I will explain why. In an interest rate environment like we currently have (historically low variable and fixed rates) you would be giving up some of the upside of having a variable rate. Let’s consider an example. You can currently get a variable rate mortgage at 1.65% for 5 years. The current 5 year fixed rate is around 4.3%. Let’s assume you take the variable rate at 1.65%….how much would it have to increase before it reached the fixed rate level? It will have to increase by 2.65 percentage points before you would be at the same rate as you would have been if you took the fixed rate. Most “experts” are predicting we will see variable rates increase by about 1.5 percentage points by the end of 2011…..so you are still well below the fixed rate. Of course none of us have a crystal ball so we don’t know where rates are actually going to go in the long term, but I think it is pretty safe to say it could be 3 years or more before we see variable rates climb to above 5%. That means you have quite a bit of time to save money on your mortgage before your rate climbs significantly. This could equal thousands of dollars in interest savings…depending on the size of your loan.

I also realize that a variable rate is not for everyone. If you are more comfortable with a fixed rate…..then go with a fixed rate. If you are looking for the stability and security of consistent mortgage payments, then why would you add a variable component to the mortgage. I would dare to say most people that elect for a hybrid mortgage are people that probably would have gone for a 100% fixed mortgage if their mortgage provider didn’t talk them into this product and subsequently they probably allocate a very low percentage of the mortgage to variable. As a result any interest savings would be minimal.

The article quoted Steve Garganis from Verico Mortgage Now brokerage as their contrary opinion for the article. Although I agree with the fact this mortgage is not for everyone, I disagree with his reasons why. Mr. Garganis mentioned that the variable and fixed portions of the mortgage can have different maturity dates and as a result be very difficult to move to a different lender if the client chooses. I would say most of the time this isn’t the case and both parts of the mortgage would mature at the same time. I will say that depending on the lender and how they register the mortgage against the property, it could be difficult to “switch” the mortgage to a new lender and a total refinance might be required. This could result in the client having to pay $1,000 or so in legal and appraisal fees.

In closing I think it is great we have access to so many different mortgage products and options, but we must keep in mind that every individual is unique and will require a unique mortgage solution. Maybe a hybrid product is exactly what you need, but the key is working with a qualified mortgage professional who can show you the benefits and pitfalls of several options and help you get the mortgage that is right for you.

I would love to hear your thoughts and possibly your experiences on the subject. Feel free to leave a comment below or send me an email.

Related articles by Zemanta

• When to Switch From a Variable Mortgage to a Fixed Rate Deal (home-mortgages.suite101.com)
• What is a Variable Rate Mortgage & When is it the Best Deal? (home-mortgages.suite101.com)

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