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A fixed mortgage? A variable mortgage? Why not both?
If you are looking at renewing your mortgage this year, you will definitely be facing some payment shock with higher interest rates. If you are looking to purchase a new home, locking in at today’s higher interest rates may not feel prudent at this time.
With interest rates on both fixed rate mortgages and variable or adjustable rate mortgages on the rise, a hybrid mortgage could offer some flexibility and reduce the impact of rising rates. You can diversify your mortgage risk similar to how you can diversify your investments.
A Home Equity Line of Credit could also be included as some lenders allow the mortgage to be broken into multiple components. You can mix and match terms in a multitude of combinations.
A hybrid mortgage allows you to manage the risk of interest rate fluctuations effectively in times of economic uncertainty with a fixed rate component and, at the same time, possibly take advantage of the lower rates on the variable rate portion of the mortgage particularly if rates start to decline during the term of the mortgage.
It can also diversify your mortgage’s conditions, including terms, amortization, payment frequency, etc. and spread out your payments so they are not all due at the same time.
The best option is to match the terms – five-year fixed with a five-year variable so if you don’t like the lender’s renewal offer you are free to easily move to another lender with a better offer instead of possibly paying a penalty on a portion of the mortgage that has a different renewal date.
Hybrid mortgages are collateral mortgages. If your mortgage is divided into different terms that mature on different dates, you could be faced with a penalty should you decide to break the mortgage early.
This type of mortgage is also more difficult to transfer to a new lender so fees could be charged to make a switch.
If you can’t decide between a fixed rate and variable rate mortgage then a hybrid mortgage could be a good option to limit your interest rate risk. It could be a great option if one party wants to go fixed and the other leans towards variable.
A hybrid mortgage is a more complicated product to consider but depending on your specific needs it may be the right choice for you. Benefits include the potential for interest savings, flexibility in payments and amortization schedules, and the savings of a variable mortgage mixed with the reduced risk of fixed rates.
As always, my best recommendation is to speak with a mortgage professional to review your possible options. Please give me a call to discuss at 1-888-561-2679 or email [email protected].
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.
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