What’s a Hybrid Mortgage, and Is It Right for You?
Posted by “Mortgages Mortgages”
As the housing market continues to pummel forward despite the pandemic, new homeowners are shopping around for the best home loan options. Quite often, the concept of a hybrid mortgage goes unnoticed, as some individuals are unaware of its existence. Alternatively, many focus on the most common mortgage home loan options. These include a fixed-rate mortgage or an adjustable-rate mortgage.
For those unaware, an adjustable-rate mortgage offers a lower interest rate and payment at its onset. However, during the loan term, the interest may increase as the market rate shifts. On the other hand, a fixed-rate mortgage offers the opposite. It affords a higher payment and interest rate initially, but this rate remains stable for the entire loan term.
There are significant advantages to acquiring a hybrid mortgage. It offers a combination of features from each home loan mentioned. If you are interested in learning about mortgage rates in Canada, continue reading below. Specifically, we will provide clear cut information on how a hybrid mortgage works in this article.
What is a hybrid mortgage?
A hybrid mortgage offers a unique approach. It combines advantages that are only offered by other mortgage options individually. As the name suggests, it affords features that enable borrowers to reap the maximum out of the most popular mortgage types. Depending on your lender, they can mix terms to suit your needs. For the benefit of borrowers, there is also an option that encompasses an adjustable component and a fixed rate component.
With this half-and-half option, you are shielded on several levels. First, you are safeguarded from the effect of growing rates. This advantage stems from the fixed component, which offers homeowners a cushion, should the prime rate rise. It also provides the value of a variable addition. Here, you are afforded the benefit of a lower rate, which adjusts to accommodate the market.
Who will benefit from a hybrid mortgage?
Almost anyone who deems a hybrid mortgage appropriate can benefit from it considerably. However, a hybrid mortgage is typically suitable for individuals that are indecisive about a mortgage option. Primarily, those who are unable to decide between a fixed or variable rate may find it fitting. Ideally, this is because it offers the best of both options.
Furthermore, persons that prefer low immovable rates may view this option appropriately. As emphasized previously, this option adheres to the stagnancy of fixed rates. Hence, they are protected from fluctuation. This feature makes hybrid mortgages great for couples with differing views and those who prefer to minimize their risks.
Finally, a hybrid mortgage is also suitable if a mortgage is broken early. Generally, a homeowner may break a mortgage if they wish to refinance it, put their home up for sale before the term is up, or switch lenders to acquire the best rate. However, unlike other mortgage options, which authorize a high penalty, a hybrid mortgage is much lower. With this type of mortgage, a lower penalty is given, despite severance of the agreement.
If a hybrid mortgage sounds appealing to you, then you should not hesitate to consider it. Many individuals end up avoiding this option because they are unaware of its benefits, or it is presented to them in an unclear manner. Also, it may be paraded as an unattainable option because of its associated costs. Although hybrid mortgages have their expenses, they are quite beneficial, especially for high mortgages.
What are the advantages of a hybrid mortgage?
Low Initial Payments
Upon inception of a hybrid mortgage, payments can be notably lower than other home loan options. With these lower initial costs, homeowners can expect to save. As a homeowner, savings are very rewarding. They enable you to apply surplus funds to other home expenses, such as renovating or paying for things that need to be touched up around the home.
Fixed Introductory Interest Rate
For a while, homeowners can expect to benefit from a fixed introductory rate. This option, along with the adjustable rate, enables homeowners to benefit in a double capacity.
Luckily for the borrower, rates may be subject to fluctuation, but they cannot increase irrepressibly. Rate caps are put in place for this type of mortgage to minimize exponential rises. Parameters are set to ensure that your rate remains manageable to some degree.
What are the drawbacks of a hybrid mortgage?
Potential Volatility after the Fixed Term
After the fixed period has expired, the variable period surfaces. Although rate caps remain in place, increased payments are subject to follow. Hence, this can imply that you could be making higher mortgage payments within a matter of a few years. The disadvantage of this type of mortgage is its instability. For individuals that are against this type of uncertainty, you are encouraged to proceed with caution. Paying attention to the market to evade any surprises may work highly in your favour.
Limits on Monthly Payments
Restrictions on payments, or “caps,” as they are referred to, are often used to limit how much you pay, especially on a variable rate mortgage. Despite its intended expectation, this can actually do more harm for the borrower than anything else. It can have an adverse effect, which can cause the interest to be higher than the monthly payments. The result can be a significant financial setback that inflates your principal. If you are worried about mortgage rates in Canada, you should speak with your lender to understand its impact.
Originally posted on https://www.mortgagesmortgages.ca/