Pros and cons of splitting your mortgage

When it comes time to refix your home loan, you may hear people talk about “splitting” your mortgage.

But what does this mean? And should you do it?

First up, what is splitting, anyway?

When we talk about splitting a home loan, we mean dividing it up into smaller parts so they can be fixed on different interest rates for different terms. If you have borrowed $500,000, for example, you could fix $200,000 for two years, $200,000 for three years, and $100,000 for one year. Or any combination of terms you like! You can split your loan into lots of smaller loans, or just divide it in half.

Why would you want to do this?

One of the main reasons people do this is to spread their interest rate risk. When your loan is split and fixed on different terms, it means you never have the whole amount coming up to be refixed at one time.

If interest rates are rising, you only have to deal with a higher repayment on a smaller portion of your overall borrowing at any one time, giving you time to adjust. You won’t end up in a situation where you have to refix your entire loan just as interest rates hit their peak, and watch from the sidelines as they start falling again.

And if interest rates are falling, it means you may get a chance to lock in a lower rate earlier than you otherwise might have, if you have some of your lending on a shorter-term fixed rate.

It also gives you flexibility to increase your repayments or make lump sum payments more often, because you can assess whether you want to do this each time one of your smaller loans comes up to be fixed; or you could keep a portion of your balance on the floating rate, as you can usually make additional repayments at any time with no penalties.

But are there drawbacks?

Some people find it confusing to have a lot of loans with different repayments going out at different times. If you like simplicity, the idea of one loan and one repayment may be more appealing.

You may also be the type of person who values certainty over paying the lowest interest rate. In that case, you may prefer to fix all your loans for a relatively long term so that you know what your repayments will be for a longer period of time, and can budget for them accordingly.

While splitting a loan offers interest rate protection, it also means 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.

It can also mean it’s harder to make big changes. If you wanted to move to a new bank, for example, or sell your home and move out, you might have to break more loans to do so, potentially incurring early repayment penalties.