Split Mortgage
In times of rising interest rates, a split home loan can help homeowners enjoy both fixed-rate and variable-rate benefits at a set period they choose. A split mortgage allows for more flexibility, but with fees, you should thoroughly consider it before committing to the split.
This article aims to provide a useful overview of how a split home loan works, whether they are more expensive compared to other loan types, and what they entail for mortgage holders.
What is a split home loan?
A split mortgage is an option that allows you to allocate a portion of the loan term to a fixed interest rate and another portion to a variable interest rate. Split home loan isn’t a product; rather, it is a type of interest rate type that offers the flexibility to enjoy different rate structures.
Splitting the mortgage can be 50:50, 60:40, or any other ratio that can give you the best terms.
Say you are applying for a 30-year loan of $300,000 – with a 50:50 split. The first $300,000 would be subject to a fixed interest rate, and then come the time for the other half then the $300,000 would attract the variable rate.
The fixed rate won’t be affected by cash rate fluctuations whether it increases or decreases. For example, the above amount with a fixed rate of 4.50% would be around $1,520 per month. Once that ends, the variable rate would be set to the bank standard variable rate (BSVR), assigned by lenders. A 2% hike for example would add over $300 to your repayments.
Split mortgage provides the opportunity to hedge against potential interest rate fluctuations when fixed while maintaining flexibility with extra repayments during the variable phase.
Why consider a split mortgage
Split home loan keeps things flexible and balances your interest rate benefits. Here are some advantages to this setup:
Interest rate security – By splitting the loan, borrowers can enjoy the stability of a fixed interest rate for one portion, providing assurance against rising interest rates and predictable repayments. A borrower may be able to save thousands in case the interest rates experience massive hikes.
Flexibility – Split mortgage enables you to hedge your bets. By diversifying the risk, the fixed portion keeps the repayment amount set, while you can open for earlier repayments once the variable rate happens. Moreover, you have complete control over the split, which can be 80:20, 50:50, and so forth.
Unlimited repayments – once the variable phase of the loan comes, you can make extra repayments on your debt and reduce the size of the loan quicker than if you were stuck with a fixed rate.
Additional features – Splitting the home loan allows you to access loan features more accessible to variable rate loans like a full offset account or redraw facilities.
What are the drawbacks?
Split mortgage has its fair share of potential traps. These include:
Rate timing risk – The variable rate portion of a split home loan exposes borrowers to potential rate increase and overstretched monthly budget due to higher repayments. In addition, missing out on potential cash rate drops during your fixed rate years will also keep your repayments higher than they need to be.
Complexity – Managing multiple loan portions can be more complex and may require closer monitoring of interest rate movements as well as potential ongoing fees.
Added costs – Split mortgage may not necessarily save you on costs because it incurs additional account-keeping fees, such as loan splitting fees or valuation fees. You could be charged a break cost if you repay early while on the fixed term.
Less availability – Not all lenders offer split mortgage. Opting for one could leave you with only a couple of options as opposed to applying for a standard home loan with either a fixed rate or a variable rate.
If you’re not sure what split ratio is the best for your loan application, an experienced financial adviser or mortgage broker from Intellichoice may assist in researching the best rates and split loan providers.
Is split mortgage more expensive?
In terms of cost, split home loans do not necessarily have higher interest rates or fees compared to other loan types.
However, it’s essential to consider the terms and conditions offered by different lenders carefully. Some lenders may have specific product structures or pricing variations for split loans, so it’s advisable to compare options and seek professional advice to find the most suitable and cost-effective solution.
The split mortgage can offer access to valuable features, like an offset account that allows you to get on top of repayments to offset the interest payment on the loan.
The key to making a split home loan worthwhile is to maximize the timing and features effectively. It’s also crucial to consider where the housing market is right now regarding the interest rate cycle. If the trend is on the increasing side, then fixing could be the smarter move. But once the rates drop again akin to what was recorded during the lockdown, then having a variable rate could keep mortgage repayments low.
Have any questions? You can always call our mortgage specialists to get an in-depth view of what a split loan arrangement could look like, and if it aligns with your current and future financial plans.
