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Is a split mortgage a good option?

Is a split mortgage a good option?

June 25, 2024

Knowing which home loan will work best for you can be difficult. One option to consider when managing your mortgage is splitting it into tranches. This means dividing your loan into different portions, each with its own interest rate and maturity date.

Mortgage splitting can present a valuable solution for homeowners, yet it is important to understand both its potential drawbacks and benefits before making a decision.

Today, I’ll explore the concept of splitting your mortgage and discuss whether it could be a good option for you.

What does splitting your mortgage into tranches mean?

Splitting your mortgage into tranches involves dividing your loan into multiple parts, each with its own terms and conditions. This allows you to have different portions of your loan at varying interest rates and maturity dates.

Diversifying your home loan into multiple fixed loans offers a risk-hedging approach by spreading your mortgage exposure across different maturity periods. This strategy protects against interest rate fluctuations. If interest rates increase, only a portion of your mortgage is affected, not the entire amount.

Why split your mortgage?

The primary reason to consider splitting your mortgage is to mitigate the risks of interest rate volatility. By having all your loan amounts mature at different times, you avoid exposing your entire debt to the interest rates prevailing at a specific point in time. Given the volatile nature of interest rates, this approach can offer relief against unfavourable rate fluctuations.

Splitting your mortgage enables you to take advantage of different interest rate terms. For example, you can opt for fixed-rate terms for one portion of your loan and variable-rate terms for another. This allows you to tailor your mortgage to your financial goals and risk appetite.

The disadvantages of splitting

While there are benefits to splitting your mortgage, there are also some drawbacks worth considering. One notable disadvantage is that it can make refinancing more challenging. If you decide to switch banks or lenders, you may incur additional costs associated with each tranche of your mortgage.

However, negotiating a better deal is often easier when the bank perceives you're at a higher risk of leaving. This is particularly true when rates fall, as you may incur break fees when restructuring your loan.  

One thing to keep in mind is that if rates fall fast, you can only take advantage of that as each portion rolls off its fixed term. Sometimes that can mean waiting longer for the low rate to apply to the whole loan balance than you might have if you had just the one.

How to split your home loan

The method of splitting your home loan varies depending on your individual circumstances. There is no universal approach that fits everyone. Seeking guidance from a financial advisor specialising in mortgage debt reduction will allow for a thorough analysis of your situation.

Know your options

Splitting your mortgage can be a sensible strategy to manage interest rate volatility and personalise your borrowing terms. If you are considering splitting your mortgage, I highly recommend consulting with a reputable mortgage advisor who can provide tailored guidance based on your specific financial situation and goals.

As the founder of Benchmark Mortgages, I’ve made it my job to help you make the best decisions regarding your mortgage options. Reach out for a free personalised consultation today and feel confident about funding or re-structuring your property.

 

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