Should I use a split mortgage?

Dear Sir / Madame,

I am busy getting quotes for a mortgage. I am still not sure if I should get a 10 year fixed rate mortgage or if I should split the mortgage into two mortgages - one LIBOR and one fixed mortgage. Which is the better option?

I look forward to your feedback.

Greetings,

Whether or not splitting a mortgage is beneficial depends on your specific circumstances. It also depends on how interest rates develop, the types of mortgages in question and your financial situation.

There are numerous possibilities for how mortgages can be slpit and combined. For example, you could use several fixed rate mortgages or a combination of fixed and LIBOR-based mortgages.

Here is a basic list of the pros and cons of splitting mortgages:

Advantages of splitting:

The primary advantage of splitting a mortgage is that it can help you pay less. Depending on market rates, a LIBOR-based mortgage may be more affordable than a fixed rate mortgage and vice versa. Using a combination of the two can help you get the best of both worlds. For example, you may pay less for a LIBOR mortgage than a fixed rate mortgage while market rates are low, and use a fixed rate mortgage from a future date when you expect interest rates to begin climbing.

In the best case, splitting your mortgage into two or more tranches can save you a lot of money compared to using a single mortgage solution.

Disadvantages of splitting:

in many cases, mortgages are split using complex and unnecessary splitting models. The complex nature of these mortgages can make an accurate calculation of total costs very difficult. Sticking to simple mortgage splitting models is recommended.

The minimum home loan required with each part of the mortgage is typically between CHF 100,000 to CHF 200,000. If you are getting a realtively small home loan, your mortgage splitting options will be limited.

The rule of thumb is: The larger the loan, the better the mortgage conditions you can expect to get. When you use mutliple smaller mortgages instead of a single large mortgage, the rates which you get for each individual tranch may be less favorable.

When you use a split mortgage, changing mortgage providers becomes complicated - particularly when the mortgage terms of your mortgage tranches vary.

In many cases,  a single LIBOR-based or fixed rate mortgage works out cheaper and more flexible than a split mortgage made up of many smaller mortgages. However, this is not always the case and benefits vary based on fluctuations in interest rates.

The low-cost mortgages available online (without consultation) are typically basic, non-split mortgages.

Verdict:

Splitting a mortgage requires a careful analysis of your finacial and mortgage situation and is not something you want to rush into. While there are possible advantages, splitting a mortgage brings with it a number of disadvantages.

Mortgage consultants and agents often recommend mortgage splitting, but it is important to understand that the more complicated mortgages are, the more dependent mortgagors are on consultants. This means potential ongoing business for consultants (if you want to refinance or adjust your mortgage in the future, for example).

Best regards from Moneyguru

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