A ‘Split Home loan’, ‘Split Facility’, or ‘Split Mortgage’, is a home loan that combines a Fixed Home Loan and a Variable Home Loan. In essence, a Split Loan allows you to split a home loan into two accounts, both of which attract interest rates and features that are specific to that loan.
A split mortgage has two components: fixed rate and variable rate. The fixed component allows you to lock in your home loan for a certain period of time, usually one to five years, and the variable component offers a little more flexibility but provides a rate that will move with the RBA cash rate changes. Most lenders offer borrowers the ability to split their loan, but not necessarily on all of their products, so it can be worth checking whether a particular loan you are considering can be used as part of a split arrangement.
The primary benefit of the split facility is that the arrangement protects a portion of your loan from an increase in rate. You’re essentially betting against a cash rate decrease and investing a proportional amount of confidence in the fixed component. This provides less exposure to a monthly obligation if the rate does indeed increase.
A split loan isn’t actually two loans (as it is often described). Instead, it is a feature included within a loan package.
Advantages of a Split Rate Mortgage
- Security. The fixed component of the loan lets you manage the risk of interest rate fluctuations, protecting you from sudden interest rate rise.
- Flexibility. The risky than the fixed component, the variable component of the loan allows you to take advantage of potential interest rate decrease. You may continue to make extra repayments on the variable component, enjoy the potential features (such as multiple offset accounts), and enjoy what is normally a fee-free offset facility.
- Competitive Rates. You can take advantage of the competitive variable market. Banks compete against each other by way of their comparison and interest rates, so the product comparison rate is a tool for banks to compete against each other.
The split product certainly isn’t without its disadvantages. Some are listed below.
- Rate Decreases. As introduced above, if a rate decreases your fixed component will not benefit from the rate change.
- Break fees. Break fees from the fixed component, and therefore any split loan, can be huge. If your circumstances mature, or rates drop to a point that justifies refinancing, any benefit may be offset by the cost of leaving your current mortgage. In some cases the ‘other’ bank will pay the break fees on your behalf in order to attract your business.
- Additional fees. You might attract added establishment and ongoing fees that may be charged on both the fixed and variable components of your loan.
- Complexity and cost. A split loan ‘essentially’ means having two separate loans (in a single loan) meaning there are more variables to consider when choosing the products and making your application.
The Split Amount
The split amount is essentially up to you. You may opt for a 50/50 split, 80/20 split and so on. The split is usually determined upon your financial position and assessment of the risk.
You may generally split a loan up four times, with a $20,000 split minimum, although the latter value often varies. Keep in mind that splitting a mortgage means you distribute interest rate movements and risks involved with each feature. It is advisable to seek advice from a professional financial planner before you decide to choose a split mortgage (we can obviously assist).
Can a Guarantor Secure a Split Loan?
Yes. With the help of a guarantor most lenders allow you to borrow 100% loan to value ratio (LVR), or even 105% to cover additional costs such as government stamp duty. Most lenders will waive the requirement for Lenders Mortgage Insurance (LMI) if you have a guarantor although this doesn’t always apply.