You’ve got a mortgage – but have you thought about having two, or maybe even more?
It might sound a strange thing to suggest, but dividing a home loan into smaller parts can be a really good way to manage your debt.
Here are a few reasons why you might want to think about splitting your home loan.
When it comes to borrowing, one of your bigger risks is probably rising interest rates. And you’re most exposed to this risk if you have all of your loan coming up for refixing at a time when interest rates are higher than when you took out your mortgage.
You can reduce this risk by dividing the loan up and fixing it for a range of different terms. You might take a $500,000 loan and fix $250,000 for two years, $100,000 for one and $150,000 for five years, for example. That means that if interest rates rise quickly in the next year, only a small part of your loan ends up on a higher rate, and the increase in repayments isn’t so high. But if rates fall, you have the chance to take advantage of that, too. The terms that are right for you will depend on what your five-year plans are.
Splitting your loan gives you the chance to check more often whether you could afford to increase your repayments.
If you were to fix your whole loan now for a number of years, you would choose a repayment amount that you can afford on your current budget. But within the period of that fixed term, you might receive pay rises or other income boosts that mean you could actually afford more.
In the scenario we discussed above, every year or so you’ll have a chance to check in on part of your borrowing. Each time you do, you can assess whether you could afford to bump up your repayments, in turn reducing the term of your mortgage.
You can also make additional payments up to a certain threshold on each of the loans during their fixed terms, or you might want to keep some floating to allow you to make as many extra repayments as you like.
With a split loan, you could make one portion a revolving credit facility. This is a bit like a big overdraft on a regular transaction account.
Some budget-conscious borrowers have a portion of their loan on a floating rate, and then have all their income go into the account – at the end of the month they then pay the bills from the account and what is left over reduces the amount they owe. Having their income sitting in the account between the time they were paid and when the bills fell due reduces their interest cost overall.
It’s easy to set this sort of structure up when you first take out a home loan, but you will probably be able to do it even with existing borrowing. When your loan comes up for refixing, we can talk to your lender about dividing it up.
If you’re wondering about splitting your mortgage, or just whether you’ve got the structure right, get in touch. As mortgage advisers, we can talk about your options and what might be the best solution for you.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.