Does your mortgage need to do the splits?
Does it ever feel like deciding on your mortgage strategy is a bit too big a decision to make in one go?
Choosing an interest rate for your home loan can be challenging. Fixed or floating? And if you decide to fix, do you opt to lock it all in on a long-term fixed rate or go for a short term one for now?
There might be another solution you haven’t yet considered: Breaking up the loan and taking a range of options, all at once.
Having the best of both worlds
Not sure how split mortgages work? Here’s a practical example.
If you have a $400,000 loan, you might choose to fix half of it over a long-ish term. This means you don’t have to think about that portion of the loan for a while and have an element of security about what your costs will be into the future.
You might then fix $100,000 for a shorter term, perhaps a year or two, so that you have the opportunity to refix sooner at a better rate if rates continue to fall.
You can then choose to fix the remaining bit for a term somewhere in the middle, or leave it floating, depending on your circumstances and the current market.
Why would you bother?
Splitting a loan this way means you’re not committing a huge chunk of money to any particular rate or term.
Many people find that splitting a loan into a range smaller units is a good way to get the most of current special rates, but also leave flexibility to lock in lower rates as they come up.
It can also reduce the risk of having your whole loan roll off a fixed term just when rates hit a peak. (That might seem unlikely right now, but it could happen again eventually)
To put it simply, splitting your loan means you’re only exposing parts of what you owe to changes in the interest rate market at any one time.
Flexibility rules
Splitting a loan can also give you the opportunity to pay off the mortgage more quickly, if you have the chance.
If a chunk is left floating, you have the option of making extra payments without penalty whenever you have additional funds. Even if you don’t want to float, splitting can be a good way to help keep your foot to the floor with payments, by paying extra or shortening the mortgage term to pay extra.
Each time a fixed-rate portion of your home loan is due to expire, you’ll get the option to decide whether you can afford to pay more than the minimum repayment. For example, if the interest rate has dropped since you last fixed your rate, you can opt to keep repayments at same level or even higher. By paying extra on a regular basis, you’ll be paying off the principal of your loan faster – reducing the life of your mortgage and the overall interest cost with it.
However, most fixed-rate mortgages come with an early repayment fee and the lender doesn’t allow you to pay extra over a certain limit, without the penalty applying. Please get in touch to learn more about early repayment fees and what your options could be in this space.
Like to talk about your mortgage needs?
A lot of different factors go into deciding what the right term might be for your circumstances. Some people need to have certainty of repayments for the long term, while others are planning to sell their house soon or simply like the flexibility that floating rates provide, of making extra repayments without incurring fees.
As mortgage advisers, we can help you make an informed decision about your mortgage and make the most of the current low interest rate environment. If you’re wondering about your options, give us a call today 0800 000 518.