γ-Secretase is an aspartyl intramembrane protease that cleaves the amyloid precursor protein (APP) involved in Alzheimer’s disease pathology and other transmembrane proteins. Substrate-bound structures reveal a stable hybrid β-sheet immediately following the substrate scissile bond consisting of β1 and β2 from the enzyme and β3 from the substrate. Molecular dynamics simulations and enhanced sampling simulations demonstrate that the hybrid β-sheet stability is strongly correlated with the formation of a stable cleavage-compatible active geometry and it also controls water access to the active site. The hybrid β-sheet is only stable for substrates with 3 or more C-terminal residues beyond the scissile bond. The simulation model allowed us to predict the effect of Pro and Phe mutations that weaken the formation of the hybrid β-sheet which were confirmed by experimental testing. Our study provides a direct explanation why γ-secretase preferentially cleaves APP in steps of 3 residues and how the hybrid β-sheet facilitates γ-secretase proteolysis.