What is a split home loan?
A split home loan is where a borrower has more than one home loan product, commonly for the same purpose—like buying a home. Instead of having one loan for their required loan amount, they can have the same loan amount spread across different loan products.
Each loan account usually as a unique account number.
Split home loans allow borrowers to access features they might otherwise miss out in if they had to choose a single loan.
How does a split home loan work?
First up – many, but not all, Australian lenders offer a split home loan feature.
The attraction of split home loans for borrowers is they don’t need to choose one home loan product over another when both have their appeal. Instead of a loan amount being advanced to the borrower as one single home loan, it is instead advanced as a combination of different home loan products.
Borrowers with split loans are usually aiming to strike a balance between different loan features. A split home loan might appear to offer the best of both worlds, but it still requires compromise. Instead of choosing one loan product over another, a split loan needs borrowers to decide on the proportions they want for each loan split.
A popular combination for a split home loan is to have both fixed and variable home loans. With different loan accounts, each has the minimum monthly repayment calculated differently.
Below is an example of how two different repayments will be required for a split home loan.
Who is a split home loan good for?
Owner occupiers
A popular split home loan combination is to have both fixed and variable loans. A split home loan like this can allow an owner occupier to make overpayments to, and potentially offset, the variable loan split. A fixed portion of a split home loan can offer borrowers offer some repayment certainty by protecting that loan split from rate movements.
The appeal of a split home loan to many owner occupiers is that it offers the option to build up equity while getting some protection from potential rate rises.
Investors
A split home loan is a popular strategy that investors can use to help them purchase an investment property using existing property equity—and minimise their property exposure.
In my experience as a mortgage broker, I commonly saw property investors split their investment property loans to avoid cross collateralisation.
A split home loan for an investment property can look like this:
The above example shows how an investor can use equity to help buy an investment property. A split loan, combined with correct loan structuring can enable an investor to only use the amount needed from existing equity – nothing more, nothing less. This is a common way of using equity to buy an investment property and avoid cross collateralisation.
This example is a variation to a typical split home loan in that the investor has split the required loan amount across two different properties:
- All the lending is still for the same purpose – buying an investment property.
- Each loan split could still be the same or different loan product – fixed or variable.
- One split loan secured against the existing property with the equity – covers the deposit and costs.
- The other split loan secured against the new property – covers the remaining funds, usually at an 80% loan to value ratio.
Joint borrowers
Borrowing with a partner or spouse is considered common given they (usually) live under the same roof and so should both benefit from the lending arrangement.
Borrowing with somebody else, like a friend or sibling, is something many Australians are considering as a means to getting into the property market.
Before I continue: Ownership structure and joint loans is something borrowers should certainly seek financial and legal advice around.
What I have seen in my experience as a mortgage broker is friends (and sometimes spouses) buying together and then arranging a split home loan where they take ‘responsibility’ of one loan each. A split home loan in this case could be two of the same type of home loan product, or different home loan products. What usually happens is that each borrower makes repayments to ‘their loan’ from ‘their’ transaction account. Under this structure both borrowers are co-borrowers on all lending.
My generous use of quotation marks highlights this arrangement being in ‘spirit’ only. Split home loans do not replace the joint and several legal responsibilities each borrower has to all joint loans.
That’s right. If your name is on each loan split, then you are responsible for paying it back—even if your mate cannot.
So, in practice, a split loan can serve a purpose, albeit a limited one, when it comes to buying with friends. There are other more sound and purpose-built lending arrangements for buying with other people. These are bespoke lending arrangements, in which case a licensed mortgage broker Is equipped to make a recommendation for something well suited to your situation.
How do you apply for a split home loan?
A split home loan is something available to new and, provided a lender offers it, existing borrowers too.
As a mortgage broker during the covid-19 pandemic I saw many borrowers able to lock in historically low fixed rate home loans. Some with a new lender and some with their existing lender—without needing a refinance home loan.
When you submit a new loan application, you nominate your proposed home loan product as part of the home loan approval process. If you decide a split home loan better suits your circumstances rather than a single home loan, then it can be nominated at application stage.
In my mortgage broking experience I saw split loans for new home loan applications usually happen like this…..
First, a borrower understands how much lending they need.
Then they consider the lending product suited to their situation.
If features of more than one home loan product appeal, then a possible solution is to choose two. They have the amount needed, but across two different loan accounts—a split home loan.
These borrowers typically liked the positive features of a fixed rate loan but still wanted a variable loan portion with capacity to pay off their loan without incurring penalties.
A split loan can also be available to existing borrowers, provided their lenders offer the feature. Life happens, circumstances change and quite often an existing lender can accommodate a change in borrower needs.
Existing borrowers could fix just some of their lending, often without the need for a loan application. By fixing a portion of their home loan, and leaving the remaining loan as variable, borrowers now have a split home loan. The borrower and lender will need to explore eligibility and fees as part of the process.
Is a split home loan worth it?
Much of the time it comes down to how much exposure to rate movement a borrower is comfortable with.
A typical split loan has two loans – one variable, one fixed.
The variable home loan, while exposing the borrower to rate movements, in return offers flexibility around offset accounts and making overpayments without penalties.
The fixed rate home loan allows borrowers to plan with certainty knowing their repayments will not change for this portion of lending.
Borrowers are often weighing up the features of a fixed vs variable home loan. So, while a split loan will expose a borrower to the downsides of variable and fixed home loans, it also offers the upsides. The proportion of exposure to each is in the hands of the borrower.
Pros of a split home loan
- Best of both worlds – a combination of features to meet borrower needs. In the case of a fixed and variable split it offers a level of repayment certainty and flexibility to making overpayments.
- Borrowers decide on their split loan proportions based on their own situation.
- Some lenders have one package fee that will cover multiple split home loans.
- Can assign different repayment strategies to each loan account.
- Can combine with an investment strategy to avoid cross collateralisation.
Cons of a split home loan
- More loan accounts can mean more fees.
- It can be a tedious process to combine split loans back together.
- Not all lenders offer split loans.
- Managing two loans can mean more financial housekeeping.
FAQs
What proportion should my split home loans be?
There are upsides and downsides to different loan products so a mortgage broker can prove valuable in determining the final split home loan proportions.
There is no perfect ratio for a split loan. The degree of exposure to fixed vs variable home loan features can be quite the balancing act. It deserves some thought, and planning, so the loan combination chosen meets borrower needs as closely as possible.
Can I refinance a split loan?
Yes.
When you refinance from one lender to another, your new lending usually is enough to payout your existing lending. In the case of a split home loan, whatever the new loan structure, there should be enough funds allowed for to payout any current loans—no matter how many of them.
Can you offset a split loan?
Yes. An offset account can be paired with an eligible home loan. So, if one of your loans is eligible for an offset account then that particular split loan can be offset.
How many times can I split my home loan?
If the lender allows split home loans a typical number of loan accounts allowed is five. Others offer more.
Each lender will have a minimum loan amount per split loan.
Are there penalties to pay out a split home loan?
A split home loan is a combination of different home loan products. When it comes to paying out a split home loan, any repayment penalties will depend on each individual product.
For example, if you have a fixed and a variable home loan combination, the fixed is more likely to have payout penalties than the variable split.
Final word
A split home loan can provide a flexible and versatile solution for borrowers. This type of loan can help strike a balance between stability and flexibility, allowing borrowers to take advantage of both fixed and variable interest rates.
In summary, a split home loan offers a compelling solution for a wide range of borrowers. By carefully considering their financial goals and circumstances, a mortgage broker can determine if a split home loan is the right fit.