You contemplate between two types of home loans and it is really difficult for you to make a choice. With a split mortgage, you can have the best of both options. These loans are somewhat more complex than their traditional counterparts, but they can give you flexibility and save you money as well. Find out more about them and compare their pros and cons to make a decision.
How It Works
A split mortgage enables you to use two different repayment structures together. The principal amount is divided in two parts and each part is repaid following the respective structure. Usually, the loan is split based on the type of interest rate which is paid. You can repay one portion with a fixed interest rate and the other one with a floating interest rate. It is also possible to have an interest-only portion and a standard repayment portion.
You can select what portion of the loan to be allocated to each of the repayment structures. This will depend on your income, spending and future plans. The lender may apply some limits but they will be known to you in advance.
Benefits and Drawbacks
Flexibility is the major benefit from using a split mortgage. You can enjoy the stability which a fixed interest rate gives you plus the savings associated with a floating interest rate. Besides, in this case, you will most probably be able to make extra payments without additional fees and charges. Similarly, if you can reduce your total payment with an interest-only chunk and still gain equity with the traditional repayment portion.
When you combine fixed and floating interest rate, you will have the opportunity to save a considerable amount of money, especially if you make additional payments. The other split option will help you to become a homeowner even if you have limited income now.
The main drawback of a split mortgage is that it can be more complex to understand and to manage. You will have to make two payments every month and this can make things more challenging for you. If one of the payments is subject to changes, you will have to keep a close eye on it. You may have to pay more and higher fees.
Overall, a split mortgage can be quite useful as it enables you to exploit two different sets of benefits. However, this type of home loan may not be the easiest to manage. If you decide to go for it, you should work with a specialist who will help you to understand all the details and to prepare a repayment plan.