Split Mortgage: Dividing Your Loan Between Fixed and Variable

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A split mortgage, also known as a hybrid mortgage, is a strategy that involves dividing the mortgage balance into two distinct portions: one at a fixed rate and one at a variable rate. This hybrid approach allows the borrower to partially benefit from the potential savings of a variable rate while maintaining the predictability of a fixed rate on a portion of their loan. In Canada, several lenders offer this option, although it is less common than purely fixed or variable loans. The typical allocation varies according to the borrower's risk tolerance: a conservative profile might consider opting for 70% fixed and 30% variable, while a more aggressive profile might reverse this proportion. Each portion operates independently with its own rate, its own payment, and in some cases, its own term. In Quebec, notary fees apply to the overall mortgage deed, meaning the split does not necessarily entail additional legal costs compared to a single loan. However, at renewal or refinancing, managing two components can complicate negotiations. The AMF-certified mortgage broker plays a key role in determining the optimal allocation based on the borrower's financial profile and market conditions.

The Split Mortgage: A Hybrid Strategy to Reduce Risk

The debate between fixed and variable rates is one of the most common questions in mortgage financing. The split mortgage offers a third option: dividing your loan into two portions, one at a fixed rate for security and the other at a variable rate for potential savings. This diversification strategy, well established in portfolio management, also applies to the Canadian mortgage world.

How Split Mortgages Work in Canada

In a split mortgage, the total mortgage balance is divided into two distinct components managed under the same mortgage deed. Each component has its own interest rate, its own payment calculation, and potentially its own term. For example, a borrower with a $500,000 loan could place $300,000 at a 5-year fixed rate of 4.99% and $200,000 at a 5-year variable rate of prime minus 0.80%. The two payments combined form the total mortgage payment.

Split Mortgage (Hybrid Mortgage): A mortgage structure in which the loan balance is divided into two or more portions, each with its own rate type (fixed or variable), its own interest rate, and potentially its own term. The objective is to diversify interest rate risk while maintaining a single mortgage deed.

Advantages and Disadvantages of Splitting

Risk diversification: if rates rise, only the variable portion is affected, while the fixed portion remains stable. Conversely, if rates fall, the variable portion benefits immediately.
Psychological compromise: borrowers anxious about a fully variable rate gain partial peace of mind without completely giving up potential savings.
Increased complexity at renewal: if the two portions have different terms, the renewal dates do not coincide, which can limit the flexibility to transfer to another lender.
Separate penalties: in the event of prepayment, each portion is subject to its own penalty. The fixed portion is subject to the interest rate differential (IRD) calculation, while the variable portion is limited to three months' interest.
Limited availability: not all lenders offer this option, and conditions vary. A mortgage broker is essential for finding the best split mortgage offers.

Determining the Optimal Allocation

The ideal allocation between fixed and variable depends on your profile. A borrower with a tight budget and low tolerance for payment fluctuations should favour a higher proportion at a fixed rate (70 to 80%). A borrower with a comfortable financial margin and a view that rates will remain stable or decline could consider opting for a larger variable proportion (50 to 60%). The determining factor is your ability to absorb a payment increase on the variable portion without compromising your budget.

Frequently Asked Questions

What exactly is a split mortgage?

A split mortgage involves dividing your mortgage into two portions: one at a fixed rate and one at a variable rate. For example, on a $400,000 loan, you might place $250,000 at a 5-year fixed rate and $150,000 at a variable rate. Each portion has its own interest rate and evolves independently.

Which lenders offer split mortgages in Canada?

Several major Canadian banks and certain credit unions offer this option, although it is not always actively promoted. Monoline lenders (available only through brokers) may also offer split solutions. Your AMF-certified mortgage broker can identify lenders offering this option with the best conditions.

What fixed/variable split is recommended?

There is no universal allocation. A conservative profile might favour 70 to 80% at a fixed rate to maximize predictability, with 20 to 30% variable to benefit from a potentially lower rate. An aggressive profile might reverse this proportion. The decision depends on your risk tolerance, monthly budget, and rate outlook.

Does a split mortgage cost more in fees?

Not necessarily. In Quebec, notary fees cover the mortgage deed as a whole, whether the loan is split or not. However, some lenders may charge additional administration fees for managing two components. Check the specific conditions with your lender.

What happens at renewal of a split mortgage?

If both portions have the same term, they mature simultaneously and you can renegotiate the conditions of each portion or merge them into a single loan. If the terms differ, each portion is renewed separately, which can limit your negotiating power and complicate a transfer to another lender.

Can I convert an existing loan into a split mortgage?

Yes, but this generally involves a full refinance with associated penalties and fees. At renewal, you can request to split your loan without penalty, as the term has matured. This is the ideal time to set up a split mortgage if this strategy interests you.