Homeowners find right combination
A combination or hybrid mortgage is one of the many options available to customers buying a home.
If you’re unfamiliar with it, you’re not alone.
Feisal Panjwani, a senior mortgage consultant with Invis — Feisal & Associates, in Surrey, B.C., estimates that fewer than two per cent of his clients ask about this option.
A combination mortgage is one “where you mix mortgage terms, essentially you split the mortgage up into different components,” says David Stafford, managing director of real estate secured lending for Scotiabank.
“Our clients can split the mortgage into a maximum of three mortgage components and in virtually any way they want.”
For instance, a customer with a $200,000 mortgage could opt for $140,000 in a five-year fixed rate mortgage, with the remaining $60,000 in a variable mortgage.
Alternatively, the customer could have $120,000 in a five-year fixed-rate mortgage, $40,000 in a two-year fixedrate mortgage and the balance in a variable mortgage.
“The most common split is the five-year fixed and fiveyear variable,” says Stafford.
“The second most common, he says is a five-year fixed and one- or two-year fixed mortgage (commonly known as a long and short).”
Panjwani says these types of mortgages are useful as a way to manage interest-rate risk.
According to the October, 2012 residential mortgage market in Canada survey by the Canadian Association of Accredited Mortgage Professionals (CAAMP), nine per cent of all new mortgages in the previous 12 months were combination mortgages.
This percentage has remained constant over the past several years, says CAAMP president/CEO Jim Murphy.
The survey indicates that 71 per cent of mortgages are fixed-rate and 20 per cent are variable. “Because interest rates are so low, and there is not as large a difference between the fixed and variable rate as sometimes was the case in the past, we’ve seen a move from variable rate to fixed-rate mortgages,” Murphy says.
Combination mortgages tend to be market-specific, says Stafford.
“If you go back to 2009 or 2010 when five-year fixed rates were in the four to fourand-a-half per cent range and prime was two-and-a-quarter per cent, splitting mortgages between long- and short-term or variable rates was a much more popular practice than now,” he says.
“By doing so, they could fix their payment on much of their mortgage while taking advantage of lower shortterm rates on at least some of the balance.
“Today, with both variable and fixed mortgage rates around three per cent, there isn’t much difference between short- and long-term rates, and what we’re tending to see is people locking in their mortgage, or at least the larger portion of their mortgage.”
The kind of mortgage a client selects is based in great part on their perception of risk, says Panjwani.
“Most often it is second-time buyers or those with a lot of equity in their homes who opt for combination mortgages, as first-time and high-ratio borrowers generally want the reassurance of the fixed rate,” he says.
He often recommends combination mortgages “to investors who would find it beneficial to have various amounts of their mortgage in different baskets in order to keep track of each portion for tax purposes.”