The mixed rate of the mortgage
Little known and yet very effective in the context of a real estate investment in the short or medium term, the mixed (or hybrid ) rate includes a fixed part , followed by a variable part .
How does a mixed rate work?
You start by repaying your mortgage by following a fixed interest rate, which happens to be lower than the market average, this is called a call rate .
Then comes the part of the variable interest rate, based on an index, including a revision period and a cape .
What does the fixed part of the mixed rate consist of?
Given that you will be taking risks when the variable part comes, it is therefore logical to benefit from preferential conditions during the fixed part.
If it lasts 5 years, you will therefore have a lower rate than the market average during these five years.
What does the variable part of the mixed rate consist of?
It follows the same rules as the variable rate, in particular, it does not include early repayment indemnities when the cape is around 1%.
How to dose a hybrid rate
It is about mastering the subtle balance between the risks incurred and the compensation you should benefit from, in summary:
- The more risks you take with the variable part (high cape, high margin, short revision period), the more you should obtain an attractive call rate during the fixed part.
- The shorter the fixed part, the more attractive you should get.
When to choose the hybrid rate?
If you are looking to invest in rental property for resale in the short or medium term, this financing formula is to your advantage.
You just have to install a fixed part, which will last as long as you want to keep the good in question, then you will sell it during the variable part, without having to pay prepayment penalties if the contract allows it.
Example of use of a mixed rate mortgage
You are planning to buy an apartment in order to rent it for 10 years , then to resell it.
Your arrangement can be the following: a hybrid rate loan comprising a fixed part of 10 years plus a variable part of 15 years.
In order to be in a position to obtain an attractive call rate , suggest that your Cashloans cap the variable part at + 1% , with a review period every 3 months as well as a waiver of early repayment penalties .
This configuration will allow you to generate low monthly payments for 10 years and therefore minimize your monthly financial effort, then when reselling you will benefit from the real estate capital gain generated without having to pay reimbursement compensation following the balance of your loan with the proceeds of the sale.