Why the Hybrid Mortgage Could be a Great Option for Borrowers in 2024
New Year New…Mortgage strategies? We’ve got you covered there.
As we glance ahead at the expected financial landscape for 2024, the future is looking more positive for borrowers. Although we are seeing rates begin to decrease rapidly, they can be influenced by many factors such as immigration, excess fiscal stimulus, housing inflation, and new supply which makes the ability to absolutely rely on predictions impossible. That’s why it’s always a good idea to hedge your bets—enter the hybrid mortgage option.
What is a Hybrid Mortgage?
Hybrid mortgages combine fixed and variable rates to offer borrowers a strategic solution for their home financing. Historical data suggests floating rates often outperform fixed rates, but this isn't a guaranteed outcome. Hybrid mortgages offer a middle ground, allowing for diversification in rate types and are ideal for those seeking a balance between risk and potential savings. They are still underrepresented in the market (only accounting for about 1 in 15-20 mortgages), however their increased adoption could provide a robust option for navigating the fluctuating and unpredictable rate environment.
An Example of a Hybrid Mortgage
Bob and Sue are purchasing a home worth $600,000. The have a $200,000 down payment and require a mortgage of $400,000. They have read all of the books and understand that the “best bet” is probably to take a variable rate mortgage. When they meet with their mortgage broker, the broker asks them some questions about mortgage suitability and realizes that they are uncomfortable with drastic payment changes. The mortgage broker recommends the following:
Purchase price: $600,000
Mortgage 1: $200,000, 5 year fixed at 5% with fixed monthly payments
Mortgage 2: $200,000, 5 year variable with moving monthly payments
Decreasing the variable portion of the mortgage by half decreases the risk to the borrower by half but still allows them some exposure to the market!
Who Should Consider a Hybrid Mortgage?
For many borrowers, it could be an excellent time to take a calculated risk and choose the variable mortgage option. But for others, this choice may keep them up at night. A hybrid mortgage might be for you if:
A) Your income or risk tolerance doesn’t allow for much financial flexibility but you want some limited market exposure OR
B) Prefer to avoid as much stress as possible but want exposure to both sides of the market
Why Don’t More Borrowers Have a Hybrid Mortgage?
There are a few reasons why we don’t see as many hybrid mortgages when compared to fixed or variable options.
1) Most homebuyers don’t know they exist.
2) Many mortgage brokers don’t know the exist or how they work
3) Not all lenders offer the hybrid mortgage option. Who does? Scotiabank, TD Bank, HSBC….and this is a moving target (so probably a few more).
How Should You Set Up Your Hybrid Mortgage?
Reflecting on historical trends since the 1950s, it's evident that choosing a variable rate over a fixed five-year term was more cost-effective about 75% of the time. The benefit of variable rates increases to about 80% when rates are significantly above their five-year average. However, this still doesn't guarantee a 100% success rate, underscoring the importance of a hybrid mortgage's balanced approach. This strategy becomes particularly pertinent in light of economists' predictions of declining rates in 2024.
Opting for a hybrid mortgage with 35-50% of the loan amount in a fixed term and 50-60% in a variable term allows borrowers to take advantage of the lower fixed rates available today but also provides some exposure to the decreasing rate market.
It’s crucial to know all your options when financing a property. Hybrid mortgages simplify the process of choosing loan terms and effectively manage risk, while also offering potential for considerable savings.
