For many Canadians it can be difficult deciding whether they should chose the security and predictable payments that fixed rate mortgages offer or go with a variable rate mortgage which typically offer lower interest rate margins and outperform fixed rates about 80% of the time. The decision often divides couples who are looking for a mortgage, as one spouse may have a higher risk tolerance than the other. Combination mortgages offer exposure to both sides and can be a terrific solution for many mortgage dilemmas.
What is a Combination Mortgage?
The hybrid or combination mortgage is split 50/50, with half the mortgage being a fixed rate and the other half variable. Those who select a combination mortgage enjoy tremendous diversity, with less interest rate risk than a straight variable and a chance to save money and pay less interest should rates fall or remain fairly stable. The term of the mortgage can also be split up allowing for half the mortgage to be short and the other half long if desired. Having different terms could however put your lender in the drivers seat when you have to renew the shorter of the two terms and the lender knows the other half of the mortgage is locked up long term. Like all mortgage options there is generally a small premium paid which can be in the neighborhood of 10 basis points.
Popularity of Combination Mortgages
It seems that hybrid or 50/50 mortgages are catching on with many Canadians. According to RBC’s 17th Annual Homeowners Survey, 40% of people surveyed who are likely to buy a home within the next 2 years plan on taking out a combination mortgage. It’s important to keep in mind the keyword is planning and we all know what people plan to do versus what they actually do often varies greatly. Currently combination mortgages hold less than 10% of the market place with most Canadians still opting for a fixed rate mortgage. With increased promotion by lenders and uncertainty over Canadian mortgage rates if properly promoted and explained to clients we could see them easily top 20% over the next 2 years.
Who Offers Combination Mortgages
Not all lenders offer these types of mortgages but with more Canadians considering them, you can expect more will be offering the product in the near future. Some of the lenders that do currently offer 50/50 mortgages include; National Bank, Scotia, Merix Financial, RBC and HSBC.
Conclusion
Combination mortgages can be an excellent choice for those who are looking to hedge their bets in an uncertain interest rate environment. They could also be the right choice for anyone who wants a variable rate mortgage because of the potential interest saving, but may not have a strong enough balance sheet or safety net to go with a 100% variable rate mortgage.
Bio: Scott Ferguson is a licensed mortgage professional living and working in Toronto. For more information on mortgage products or to contact Scott visit Ontario Mortgage Loan.
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My main mortgage is an equity loan. A fixed rate, 4.99%, with the unusual feature that if you pay ahead a full month, the due date ticks out, but you also achieve the savings of interest for that time.
The HELOC (home equity line) is now at 2.5%, the lowest it can go. If our prime goes up 1/2%, this rate is the same, as it’s prime-1.5%.
So, I am able to create my own hybrid, borrowing from the HELOC to pay the first loan ahead one year, two or three, and the just making the same payment to the HELOC until the next first loan payment is due. My gamble is when do I think our prime will exceed 6.5%, which is my breakeven.
With my bank, the equity plan allow me to split the loan up to 3 mortgage and setup the term and consequently the rates as I want. I can do 50/50, 30/30/40 or 22/78 each with a different term. It requires to have at least 20% of your house paid though.
When picking a term length, I strongly recommend that you understand how compound interest and payment works with mortgages. Attempting to pick a long term to possibly save on rate increase is not guaranteed to save you money. You may have to pick between piece of mind and paying less interest in the end. Rarely can you get both.
Ahh great post!
I was thinking of doing a combo fixed/variable but decided on doing just the variable in the end. (I just have a preapproved mortgage, no house yet =P )
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There are definitely benefits to both fixed and variable, depends on the risk tolerence of the buyer.