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11 May 2019

Should you get a 'hybrid' mortgage deal?

This unusual mortgage type combines a fixed rate with a discounted period

Whether you're a first-time buyer, home mover or are remortgaging, there are pros and cons to taking out a fixed-rate mortgage versus a variable-rate deal - but some mortgages offer a taste of both.

These so-called 'hybrid' mortgages start off with a fixed-rate period, then switch to a discounted variable rate for a set timeframe afterwards.

So, are there benefits to this type of mortgage? Or would you be better off opting for a straightforward fixed-rate or discount deal instead?

Which? explains the ins and outs of hybrid mortgages, and how these types of deal measure up.

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What is a hybrid mortgage deal?

A hybrid mortgage combines a fixed-rate period with a discount period.

With a standard two-year fixed-rate mortgage, for example, you would lock your interest rate in for two years. After that, you would generally start paying the lender's standard variable rate (SVR) until you either remortgage or pay off the loan.

With a hybrid deal, you would also have a two-year fixed-rate period - but would then shift to a discounted rate (set at a percentage below the SVR) for a further period, often three years. Only after that would you move onto the SVR.

These loans remain very rare, making up just 4% of the total market. Six providers currently offer these (links take you to our review of each provider):

You can find out how these lenders compare in our full review of the best and worst mortgage lenders.

Best rates on hybrid mortgages

To find the lowest-rate deals that combine fixed rates with a discount period, Which? Money analysed thousands of deals on Moneyfacts.

We looked at two-year fixed-rate deals available at a 90% loan-to-value ratio, meaning first-time buyers would need to put down a deposit of 10%.

The cheapest deal is from Yorkshire Building Society, which offers a 1.79% initial rate, fixed for two years. Afterwards, you pay 4.25% for a further three years (a 0.74% discount on the SVR). The overall APRC is 4.2%.

Accord Mortgages, meanwhile, offers a 1.97% initial rate for two years, followed by a 4.25% discounted rate for three years. The APRC is 4.5%.

You can see the best-rate deal from each provider for a two-year fixed-rate mortgage at 90% LTV below:

ProviderInitial rate (two years)Revert rate (three years)APRCFees
Yorkshire Building Society1.79%4.25% (discount of 0.74%)4.2%£1,495
Accord Mortgages1.97%4.25% (discount of 0.74%)4.5%£995
Skipton Building Society2.09%3.99% (discount of 1%)4.5%£995
Chelsea Building Society2.11%4.25% (discount 0.74%)4.3%£495
Newcastle Building Society2.28%4.49% (discount of 1.5%)5.1%£498
Hinckley & Rugby Building Society2.39%4.49% (discount of 1.65%)5.1%£999
Leeds Building Society2.44%4.69% (discount of 1%)5%£999

How do these mortgage rates compare?

If you're looking to buy a home, you may be better off opting for a standard two-year fixed-rate product instead.

Not only are many of the initial rates cheaper, but the SVRs offered by larger banks and building societies tend to be lower than even the discounted rates offered by their smaller rivals.

So, for example, at a 90% LTV, you could take out a two-year fixed rate deal from Barclays at just 1.44%, which reverts to 4.24% - below the discounted rate offered by Yorkshire Building Society. The overall APRC is a comparable 4.2%.

Indeed, the existing borrower rates offered by Newcastle Building Society, Leeds Building Society and Hinckley & Rugby are in the bottom quarter of all mortgage lenders. So even a discount may make your rate higher than you would pay on other providers' SVRs.

If you opt for a fixed-rate deal, you'll only have one rate change over the course of a five-year period, not two. So you won't experience a shock when your discount period ends and your monthly payments suddenly jump up.

Then again, a hybrid deal may allow you to put off remortgaging (switching to a new deal) for five years, rather than doing it after two, as you will still pay less than the SVR after your fixed term expires.

What type of mortgage deal is right for me?

Understanding the different types of mortgages can be tricky, but it's worth getting your head around the pros and cons of each before you apply for a loan.

Keep in mind that both fixed-rate and variable-rate deals tend to be offered for specific time periods, usually two or five years. After this, you'll usually pay the lender's standard variable rate (unless you opt for one of the hybrid products).

Fixed-rate mortgages

Pros: Your interest rate will stay the same for a specified time, protecting you from unexpected increases. You can budget for your monthly repayments in advance, safe in the knowledge they're unlikely to change.

Cons: If you want to repay before the end of the term - for example, because you're selling up - you may face an early repayment charge, which could be hefty. These types of deals may also be more expensive than variable-rate products.

Variable-rate mortgages

There are a number of types of variable rate deals including tracker mortgages, set at the Bank of England base rate plus a certain amount, and discount dealswhich offer a percentage off the lender's SVR.

Pros: You'll benefit if interest rates drop. You may pay lower interest than with a fixed-rate deal (though not always). These deals are usually flexible, meaning you may not have to pay an early repayment charge if you move house and exit the mortgage early.

Cons: Your interest rate could increase at any time, so you could find your monthly payments jump up without warning. This could make it tricky to budget into the future, and could strain your household finances.

Get expert advice

If you're confused about your options, or you want to save time by getting an expert to recommend the best mortgage for you, it's worth speaking to an expert mortgage broker.