Buying a new home is a big step, whether you have experience in buying and moving or not. It can be especially daunting for first time buyers who haven't yet explored the maze of financial opportunities that could be offered to buy that dream property. The sensible way to approach the possibility of taking out a home loan – it's unlikely that you'll ever take out such a large loan for anything else – is to take the time to do some careful and detailed research and compare the range of options available. One such option is called split loans, and below is some information on how these work.
What are split loans?
To set these in context, you need to remember that a loan you take out has to be repaid in full plus the interest charges – it may sound obvious, but it's worth stating so that you are under no illusions as to what you're taking on. There are different ways to arrange repayments of your loan, even if it is a relatively small one, but for larger home loans, you need to weigh up what will be the best way to make repayments on a monthly basis that isn’t going to stretch your finances. Let's look at the three main ways that you could arrange to pay off your loan.
- Split interest loans: loans are usually repaid - when they are for a mortgage - either by variable interest, fixed interest or split interest. Split interest is when you have a blend of a variable rate and a fixed rate. When you choose this, a part of your monthly payments are paid at an initial interest rate, but that can be varied depending on the rise or fall in interest rates. The fixed rate part of split rates is a level of interest that you have agreed with your lender over a specific period of time. It doesn't change, and though you wouldn't benefit from a drop in interest rates, you're protected from a rise in them.
- Fixed rate loans: as above, this is where your lender offers you a rate that stays the same for the agreed period. It can help you control your cash flow and can be useful in terms of a split loan to give you a measure of control as to what you will repay every month.
- Variable rate loans: if you're comfortable with the possibility of your loan interest rate going either up or down depending on how interest rates are set by the central bank, a variable rate is probably what you would go for. When this is part of a split rate agreement, you have the certainty of your fixed rate and the potential for your variable mortgage rate to go down. It could, of course, go up.
Are there rewards and risks with split loans?
You have more control over your rates than solely with a variable interest rate loan, and you will own your property if your repayments are completed in the agreed mortgage term. If you default on a split loan, you are in danger of losing your home.