Borrowers are usually faced with the choice of a fixed or variable rate mortgage, but some lenders do offer mortgages that are a mixture of both – a hybrid mortgage – which do on the face of it give borrowers access to lower interest rates.
A hybrid mortgage gives borrowers a fixed rate period, followed by a discount period. With a typical hybrid deal, at the end of its two-year fixed rate period the mortgage would move to a discounted rate (1% below the lender’s standard variable rate (SVR) for a further period (usually three years). In effect, giving the borrower a lower rate for a longer period, as opposed to reverting to the lenders SVR at the end of the fixed-term, until they remortgage or pay off the loan.
Currently, hybrid mortgages make up 4% of the mortgage market and are only available from limited lenders.
When would a hybrid mortgage be the right choice?
When comparing these hybrid mortgages to a standard two-year fixed rate, borrowers might be better off opting for the latter and remortgaging at the end of the term, as initial rates from larger banks and building societies are often lower than the discounted rates offered by smaller lenders. Indeed, borrowers looking for longer-term security might do the maths and consider a five-year fixed rate a better option.
For some, choosing a hybrid mortgage could mean deferring remortgaging for five years. The discounted rate will still be less than their lenders SVR when the mortgage reverts after the fixed term, which could be advantageous if they are planning on selling within a few years and want to avoid the hassle of remortgaging.
Whether choosing a fixed, variable or hybrid mortgage, borrowers are encouraged to do their research to find a deal that best suits their circumstances, and if in doubt take expert advice.
