What is a hybrid mortgage, and does it ever make sense to get one?

This article has been updated from a previous version.

When it comes to selecting a mortgage, you're usually asked to choose between the certainty of a fixed-rate mortgage, which allows you to lock in a particular interest rate for your term, and the uncertainty of a variable-rate mortgage, which fluctuates alongside the Bank of Canada’s overnight interest rate. But did you know that there’s a third, lesser-known option that combines elements of both?

It’s called the hybrid mortgage. According to Mortgage Professionals Canada’s latest Annual State of the Residential Mortgage Market in Canada report, only 5% of Canadian homeowners chose one in 2020, compared to 77% who borrowed at a fixed rate and 18% who borrowed at a variable rate.

So what exactly are hybrid mortgages, and why are so few Canadians taking advantage?

Hybrid mortgages: A combination of fixed and variable rates

A hybrid mortgage, also called a combination or step mortgage, combines elements of both fixed-rate mortgages and variable-rate mortgages.

“Say you were to buy a $500,000 home, and you put $100,000 down. You need a mortgage of $400,000,” explains Leah Zlatkin, Lowestrates.ca mortgage expert. “Instead of taking the full $400,000 and putting it into a variable- or a fixed-rate mortgage, you can put $200,000 in the form of a variable mortgage and $200,000 in a fixed-rate mortgage.”

While you can choose to put different segments of your mortgage into a fixed or variable rate, the most common hybrid mortgage combination is a 50/50 split, in which half the mortgage amount collects interest at a fixed rate and the other half collects interest at a variable rate. Each portion of the mortgage is subject to different terms, however.

A popular version of the hybrid mortgage is the “5/1.” This means that the fixed portion of the mortgage lasts for five years, while the variable comes up for renewal after one year. However, most mortgage experts recommend matching up the terms so both segments mature at the same time (e.g., five-year terms for both). This makes it much easier to switch lenders if you’re not happy with the renewal rate you’re offered.

Hybrid mortgages are typically touted as a great option for:

• Young professionals who expect to be making plenty of money in the future but don’t necessarily want to delay homeownership;
• Individuals who can’t decide between fixed and variable; and
• Those who can’t handle the uncertainty of rate fluctuations.

One benefit of this type of mortgage is that by keeping a portion of the mortgage at a fixed rate, a hybrid mortgage helps to insulate the borrower from fluctuating interest rates and unpredictably high monthly payments.

But while hybrid mortgages offer lots of benefits, they don’t come without flaws and complications.

Disadvantages of hybrid mortgages

Hybrid mortgages rarely offer access to better interest rates than completely fixed or variable mortgages.

In addition, the various portions of the hybrid mortgage might have different terms, which will make it exceptionally difficult to transfer the loan to a different lender without incurring significant break penalties.

Another potential stumbling block is that hybrid mortgages must be refinanced at the end of each term, which essentially means the loan must be renegotiated. Refinancing a mortgage tends to come with a chunk of fees that will drive the overall cost of the loan up.

“The only reason I can see a person choosing this type of mortgage is if they're completely indecisive and can't decide between fixed and variable,” says Zlatkin.

Variable and fixed mortgages versus hybrid mortgages

In fact, Zlatkin says that any good broker will recommend a variable mortgage before a hybrid one. Though variable rates are currently high (at the time of writing, the lowest mortgage rate on LowestRates.ca for a five-year variable-rate mortgage was 5.30%, compared to 4.59% for a five-year fixed), you could end up paying more for a fixed-rate in the long term than a variable-rate — if or when variable rates drop.

Using the LowestRates.ca mortgage calculator, you can get a snapshot of what your monthly payments will cost you at today’s lowest fixed and variable rates over a 25-year amortization period. While a hybrid mortgage may be a good way to find middle ground, comparing mortgage rates for one or the other can ensure you reap the full benefit of the lower rate option at the time.   

You should always consult a broker to find out which type of mortgage will work best for you, but the compromise of a hybrid mortgage might offer less of an advantage than choosing a firm option and sticking with it.