Hybrid loans are a combination of fixed-rate and adjustable-rate loans, most commonly used for mortgage lending. With a hybrid loan, you start with a fixed interest rate for a set period and then your rate will be adjusted according to the terms of the loan. Hybrid loans start at a lower rate than the standard 30-year fixed-rate mortgage. This offers some protection if interest rates rise dramatically.
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. Another potential obstacle is that hybrid mortgages must be refinanced at the end of each term, which basically means that the loan must be renegotiated. A hybrid loan differs from an interest-only loan in that more money is earmarked at the beginning of the loan. With a three-year hybrid mortgage loan, the initial adjustment limit is 1 percentage point and the lifetime adjustment limit is 5 percentage points.
The main benefit of a hybrid mortgage is the initial fixed initial rate, since it is usually lower than the interest rate of a fixed-rate mortgage. 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. A hybrid loan is a mix of two types of loans, specifically a fixed-rate loan and an adjustable-rate mortgage. In addition, different parts of the hybrid mortgage may have different conditions, making it exceptionally difficult to transfer the loan to another lender without incurring significant default penalties.
A hybrid mortgage, also called a combined or tiered mortgage, combines elements of both fixed-rate and variable-rate mortgages. If you expect a raise or salary increase before the fixed-rate period ends, a hybrid mortgage could provide you with a way to get a mortgage loan now, knowing that you'll be in a good position to make payments after the fixed-rate period ends. While lenders can adjust the interest rate on their hybrid mortgage, which could affect your monthly payment, the adjustments they can make have limits. There are four hybrid mortgage products backed by the Federal Housing Administration (FHA) with fixed rate periods of three, five, seven, or 10 years.
Some financial experts believe that fixed rates and variable rates work well together when combined in the hybrid rate. An index is the variable reference rate used by lenders to determine the interest rate on a hybrid ARM loan. 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. Due to the payment limit, you may find that you're paying more for the hybrid mortgage than for the original loan amount, which could negate any savings you received during the fixed-rate period.