How does a hybrid mortgage work?

A hybrid mortgage is a mortgage loan with a fixed interest rate for a specified period of time, after which the rate is adjusted periodically for the remaining term of the loan.

Hybrid loans

start at a lower rate than a standard 30-year fixed-rate mortgage, but the rate may change after several years. As mentioned earlier, lenders can offer limits on how much the interest rate can change in a given year. This gives borrowers some protection if rates rise dramatically, but it also reduces the benefits of falling interest rates.

A hybrid mortgage, also called a combined or tiered mortgage, combines elements of both fixed-rate and variable-rate mortgages. Some financial experts believe that fixed rates and variable rates work well together when combined in the hybrid rate. When you consider the savings that a variable-rate mortgage can generate, there may be a good reason why only 5% of Canadians opted for a hybrid mortgage last year. When refinancing an ARM mortgage to a fixed-rate mortgage, it's important to carefully consider the new loan term, as it could have a significant impact on the amount you pay in total interest for owning the home.

This may not be bad for everyone, but if you're looking for a simple loan plan, a hybrid loan may not be for you. In most cases, ARMs offer lower introductory rates than traditional mortgages with fixed interest rates. A hybrid loan is a mix of two types of loans, specifically a fixed-rate loan and an adjustable-rate mortgage. When it comes to selecting a mortgage, you're usually asked to choose between a fixed rate and a variable rate.

Hybrid ARMs are very popular with consumers because they can offer a significantly lower initial interest rate than a traditional fixed-rate mortgage. When it comes to selecting a mortgage, you are usually asked to choose between the certainty of a fixed-rate mortgage, which allows you to set a certain interest rate during your term, and the uncertainty of a variable-rate mortgage, which fluctuates along with changes in overnight interest rates from the Bank of Canada. A hybrid loan differs from an interest-only loan in that more money is earmarked at the beginning of the loan. A hybrid loan provides that stability for up to 10 years, depending on the lender, before adjustments begin.

Hybrid mortgages rarely offer access to better interest rates than fully fixed or variable mortgages. If your credit needs a boost, you can benefit from relatively low rates during the first few years of a hybrid loan. By keeping a portion of the mortgage at a fixed rate, a hybrid mortgage helps insulate the borrower from fluctuating interest rates and from unpredictably high monthly payments. If a borrower hires an ARM with the intention of paying off the mortgage by selling or refinancing before the rate is restored, personal finance or market forces could trap him in the loan and potentially subject him to a rate hike that he cannot afford.