50-50 Mortgage Definition
A 50–50 mortgage, also known as a hybrid mortgage, is a mortgage combining the features of a fixed rate mortgage with the features of a variable rate mortgage. Half of the borrowed mortgage funds are repaid based on a fixed rate of interest and fixed rate terms. The other half of the mortgage is repaid under a variable rate with variable terms.
Under a 50–50 mortgage, there is only one mortgage, only the repayment terms are divided. A relatively new mortgage product, the 50–50 mortgage allows the mortgage borrower to hedge against rising interest rates, while at the same time obtaining the flexibility and lower payments of a variable rate mortgage. Should rates rise in the future, only 50% of the money borrowed is subject to the rising interest rates.
Example
Mr. McGillicuddy is seeking to obtain a mortgage for $200,000. The Lending Institution is offering a 5 year term at 5% and a variable rate at 3.5%. It also offers a 50–50 mortgage on the terms above. Mr. McGillicuddy obtains a 50–50 mortgage. $100,000 of the mortgage will be repaid through the fixed rate of 5% and $100,000 will be paid through the terms of the variable rate mortgage. Should interest rates rise, only the $100,000 repaid on the variable rate is affected. The fixed rate repayment schedule remains the same.
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First Foundation Tips
A fixed rate mortgage will often come with substantial prepayment penalties if the mortgage is repaid early, or additional amounts are paid to principal. There are 50–50 mortgage products available to allow payments to principal or prepayment of the variable side of the mortgage, without penalty. This allows the borrower to, for instance, place an additional $5,000 against their mortgage principal, while still having the security of a fixed rate mortgage.
Most investment advisors encourage diversification in an investment portfolio. A 50–50 mortgage provides a certain amount of diversification for the borrower in what is probably their largest single investment, their home.
At FirstFoundation.ca, we understand that the vast array of mortgage products and differing options can become confusing to a homebuyer. The newer 50–50 mortgages can add to that confusion. That is why we are eager to sit down with our clients to fully discuss all options, erasing the confusion and allow them to pick the best option for their needs.
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