What is a Split Rate Home Loan?
If you’re looking to purchase a house, then it’s about time you research the different kinds of mortgage loans that are available to you. You likely already know that obtaining a fixed-rate mortgage will give you the same interest rate throughout the mortgage’s life while an adjustable-rate mortgage may save you money by its interest rate going down over time. However, you may not be so well versed in split mortgages, which gives you the opportunity to benefit both from both a fixed and variable interest rate. This type of mortgage is a bit more complicated than combining the two different kinds of mortgage types as it entails a level of customization. Let’s take a look at split mortgages.
What Are Common Split Mortgage Ratios?
Typically, split mortgage loans come with a 50:50, 60:40, or 70:30 split between a fixed and variable rate. That being said, it is up to you the amount that you put into each kind of loan. To decide the type of split you want to do, you must determine the amount of risk you’re willing to take on the cash rate potentially going up.
The Lender Margins and Adjustments to a Split Mortgage
Lenders typically include several variables in the loan contract of a split mortgage that will determine the exact mortgage and interest rate payment amount. The majority of lenders will adjust their interest rates on a yearly basis. That being said some split mortgages come with a three or six-month adjustment period. Your lender will utilize an economic indicator, often a market index, which determines the adjustment of your interest rates. Additionally, the lender’s margin; a markup added on top of the adjustable rate mortgage, will also have an effect on your mortgage payments.
Split Mortgage Adjustable Interest Rate Caps
Lenders utilize three different kinds of interest rate caps for the Adjustable Mortgage Rate part of the split mortgage. The first is an initial cap that limits the amount in initial adjustment. The second is a periodic cap that limits any other adjustment throughout the length of the loan. Lastly, there is a life cap which limits the total increase that the adjustable rate goes through from the first increase to the end of the mortgage’s life. Calculating your total mortgage payment amount through the length of the loan period will help you decide if the caps and variables make a split mortgage the right choice for you.
What Are the Advantages of a Split Rate Mortgage?
Split loans are recommended for borrowers that want to lower their interest rate risk in the case of a hike in rates. You are better able to manage your loan when you’re taking advantage of both kinds of loan products. The portion of the loan that is a fixed rate helps with your budgeting since you know the exact amount that you need to pay. On the other hand, the variable loan allows you to pay as much as you want as long as you make the minimum repayment amount. Split rate loans are excellent for property investors, as they can maintain their owner-occupier loan at a fixed rate and then their investment property loan on variable terms to make the most tax deductions on increasing interest rates.
What are the Disadvantages of a Split Mortgage?
You will have low monthly payment in the initial fixed-rate period of your split mortgage. However, you may pay the price later down the road. There may be significant increases in interest rates during the adjustable rate period of your split mortgage. Moreover, you must be careful about the prepayment penalty that lenders may place on your loan. These penalties depend on the amount you take out and can cause disruptions in plans to pay off the mortgage early. This makes this type of loan not ideal if you want to remain in the home for longer than ten years.