Split loans, also known as split rate home loans, are loans where the borrower has the option to split their loan into two or more separate loans. Traditionally, this type of loan is used when clients would like to split their loan between a variable rate loan and a fixed rate loan.
You can have more than one split loan but certain lenders will have limits on the number of splits available. This feature is generally available with standard variable loans and as such each loan can attract ongoing monthly fees per split loan. Also, lenders may charge a fee to set up each loan split. It can be more economical to take out a home loan package if you want to have a number of split loans.
Split loans don’t have to be equally distributed. For instance, if you have a $400,000 loan that you want to split into 2 loans, one can be for $100,000 and the other for $300,000.
Part Fixed, Part Variable
The most popular reason for splitting loans is to apportion part of your loan balance on a fixed rate loan and the remainder of your balance on a variable rate loan. So, using the example above, the $300,000 portion is split to a fixed rate loan while the $100,000 remains as a variable rate loan. As rates go up, the fixed rate split will not change for the duration of the elected fixed term period. Inversely, if rates go down, then the fixed rate split will remain at the same rate. Obviously, the variable rate split will change as rates change.
This option allows a borrower to benefit from the certainty of a fixed rate loan, and take advantage when rates increase, while also benefiting from the variable rate loan when interest rates go down.
The following are advantages related to most split loans:
- In an interest rate rising environment, the repayments on the fixed rate split part of the loan will not increase during the fixed rate term of the loan.
- In an interest rate easing environment, the repayments on the variable rate split part of the loan can decrease.
- Allows you to divide your loan into separate loans for specific purposes.
The following are disadvantages related to most split loans:
- In an interest rate rising environment, the repayments on the variable rate split part of the loan will increase.
- In an interest rate easing environment, the repayments on the fixed rate split part of the loan will not decrease during the fixed rate term of the loan.
- If your split loan includes a fixed rate loan then there will be conditions imposed on this loan, which may include extra repayment restrictions, redraw and offset limitations, and break out costs if you wish to refinance (See Fixed Rate Loans – Cons).
- Split loans may incur set up costs, switching costs (if you current loan is not suitable for splitting) and added ongoing maintenance costs.
Talk to Keypoint now about your options and applicable costs when considering split loans.