Call: 0123456789 | Email: info@example.com

Why you should borrow money at mixed rates?


 A mortgage can be repaid with a mixed rate (also called a hybrid rate). The mixed rate contains a first part with a fixed rate, and a second part with a variable rate limited upwards. This formula has 2 major advantages. First of all, there are normally no prepayment penalties during the variable portion. Then, the rate of the fixed part is lower than the market rate, which allows the borrower to pay less interest during the first part of his repayments. Here are the benefits you could get.

Resell in the medium term without penalties

Resell in the medium term without penalties

First-time buyers resell their main residence within 7 to 10 years. However, since they have not finished paying their mortgage, they have to pay early repayment indemnities to their bank. It is for the latter to receive compensation for the shortfall in terms of interest, shortfall caused by the balance of the mortgage before the time.

In a mixed rate, the variable part does not generally present any prepayment indemnities. This lifting of the penalties serves to compensate for the risk of variation in the monthly payments taken from the borrower.

Clearly, a couple of first-time buyers borrowing at mixed rates can resell once the variable-rate part has arrived, without prepayment penalties.

According to Alex Bruner, founding president of Cream Bank, “Mixed rate loans are very advantageous because they allow you to benefit from a lower rate over a given period – generally 0.10 to 0.30 point lower than a classic fixed rate – and an exemption from early repayment indemnities during the period subject to review. The borrower wins in almost all cases even if he keeps his credit beyond the fixed period ”.

Pay less interest on your home loan

Pay less interest on your home loan

While it may be hard to believe that a mixed real estate rate allows the borrower to pay less interest, even with the presence of a variable rate party, the numbers speak for themselves.

Since the fixed part of the blended rate has a rate below the market average, the borrower pays less interest during this period. However, during the first years of a mortgage, monthly payments include up to 50% interest. Thus, the payment of this interest is made at a rate lower than a conventional fixed real estate rate.

If afterwards during the variable part the rate increases, the borrower remains a winner because the rate increase takes place at a time when the interest only represents 25% of the monthly payments.

Demonstration of the advantage of the mixed real estate rate

Example of a mixed rate property purchase

Suppose that a couple borrows $ 200,000 to buy their main residence. At current market conditions, he obtains a mixed rate thus composed:

  • 2.80% fixed for 10 years.
  • Variable part limited to 4.80% during the following 10 years.

For resale after 10 years

For resale after 10 years

 

Fixed rate

In mixed rate

Rate

3.25%

2.80%

Monthly payment (excluding insurance)

$ 1,134.40

$ 1,089.30

Capital remaining due after 10 years

$ 116,087

$ 113,893

Amortized capital

$ 83,913

$ 86,107

Amount of interest paid

$ 52,215

$ 44,609

 

As we can see, if our couple wishes to resell their main residence after 10 years, compared to a conventional fixed formula, they will have:

  • Repaid $ 2,114 more capital.
  • Paid $ 7,606 less in interest.

If the principal residence is kept, and if the variable rate increases by 1 point

If the principal residence is kept, and if the variable rate increases by 1 point

Let us assume that the borrowers decide to keep their principal residence at the end of the fixed part. Let us assume that the variable rate takes 1 point. The example below demonstrates that they remain winners.

 

Fixed rate

In mixed rate

Rate

3.25%

3.80%

Monthly payment (excluding insurance)

$ 1,134.40

$ 1,142.70

Total cost over 20 years

$ 72,253

$ 67,896

 Over 20 years, borrowers will have paid $ 4,357 less in interest, compared to a conventional fixed real estate rate.

If the principal residence is kept, and if the variable rate increases by 1.5 points

If the principal residence is kept, and if the variable rate increases by 1.5 points

Let us assume that the borrowers decide to keep their principal residence at the end of the fixed part. Let us assume that the variable rate takes 1.5 points. The example below demonstrates that they remain winners.

 

Fixed rate

In mixed rate

Rate

3.25%

4.30%

Monthly payment (excluding insurance)

$ 1,134.40

$ 1,170.00

Total cost over 20 years

$ 72,253.00

$ 71,202

Over 20 years, borrowers will have paid $ 1,051 less in interest, compared to a conventional fixed real estate rate.

Capturing the variable part

Capturing the variable part

The disadvantage of the mixed real estate rate and that it can soar during the variable part. This is why it is essential that the loan contract includes a “cap”. A cape is a limit beyond which the rate cannot increase. As a reminder, in any case, the rate of a mortgage cannot exceed the usury rate of the Lite Bank.

Here are examples of secure mixed real estate rates, as we can find today:

  • 2.25% fixed for 3 years, then revisable capped at 4% over the last 17 years (compared to 3.05% in conventional fixed rate).
  • 2.85% fixed for 7 years then revisable capped at 4.45% for 13 years (compared to 3.05% in conventional fixed rate).
  • 2.80% fixed for 10 years then revisable capped + 2 / -2 (against 3.25% at conventional fixed rate).

The advisers of Cream Bank ensure that cape clauses do appear in the mixed rate mortgage loan contracts they obtain. They carry out this check:

  • When submitting the prior offer.
  • Upon final signature.

The mixed real estate rate and the repurchase of credit

The mixed real estate rate and the repurchase of credit

Some borrowers may believe that it will still be possible to buy back a mortgage once the variable part of the mixed rate has arrived. They must realize that certain loan contracts include clauses allowing the bank to enforce prepayment penalties, in the event of renegotiation of the contract or departure to the competition.

For Alex Bruner, responsible for relations with the financial partners of Cream Bank, the banks’ objective is elsewhere:

“Offering this offer is a way for banks to stand out at a time when rates are very low. For some, mixed rate credits represent up to 50% of their production! For young people or investors who resell before 10 years of age, this is a very good formula which presents minimal risk with a significant saving ”.

Have any Question or Comment?

Leave a Reply

Your email address will not be published. Required fields are marked *