Hybrid Mortgage

by Mark Johnston

Everyone knows that the base rate will increase at some point, but the big question is when and how fast?

Therefore the key decision for borrowers is how comfortable they will feel in taking a risk that in 2 years time rates will not be significantly higher or starting to rise substantially.

Andrew Montlake, of Coreco, states “trying to beat the market is always difficult and it is best to look at the fixed element as an insurance cost”.

Data has shown that more borrowers are now opting to take what is considered to be one of the most innovative products of the last decade, the hybrid mortgage.

A hybrid mortgage is sometimes called an intermediate ARM (adjustable rate mortgage), a fixed period ARM or even a multiyear mortgage. These mortgages combine aspects of fixed rate and adjustable rate mortgages.

The initial interest rate on a hybrid mortgage is often lower than market rates and is fixed for a specific period, which is usually 3, 5, 7 or 10 years.

In most cases the interest rate changes on a hybrid mortgage are capped, which can help protect borrowers if market rates rise sharply.

Catherine Hearnden, company director at the independent financial advisor My Mortgage Direct, believes that hybrid mortgages are a great option for first time buyers stating “I think that it will keep their costs down now, but it will stop them spiralling in a few years if rates do go up”.

Simon Collins, technical manager at John Charcol, also ads that the hybrid mortgage option is “ideal for first time buyers who want to take advantage of low pay rates now, but also have longer term security built in”.

The recent spike in first time buyers looking to get on to the property ladder has spurred many lenders to begin offering hybrid mortgages as they are more affordable and less risky than other types of mortgages.

Barclays have launched a new 5 year tracker to fix mortgage deal that comprises of a 2 year tracker rate followed by a 3 year fix.

The Woolwich building society has also launched a 5 year tracker to fix mortgage which for the first 3 years will track base rate plus 2.99%, giving a current pay rate of 3.49%. It then swaps to a 3 year fixed rate of 4.29%. Borrowers will need 30% equity and will pay a £1,299 fee for this deal.

David Hollingworth, of broker London and Country, says “this type of deal offers borrowers a chance to get the best of both worlds”.

The Chelsea building society offers a slightly cheaper deal, it has a 2 year tracker rate of 2.39%, Bank of England base rate plus 1.89% points, it then changes to a 3 year fixed rate of 3.89% and carries a £1,495 fee.

The Yorkshire building society tracker to fix deal is also a better offer than the Woolwich deal. It starts as a tracker at 2.49% and then moves to a fix at 3.89%, with a fee of only £995. It is available to borrowers with a 25% deposit or 25% equity.

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