Loan Tip: What does ‘Splitting a Loan’ mean?

Loan Tip: What does ‘Splitting a Loan’ mean?

Changing one loan into 2 (or more) loans is splitting a loan.


Example

Homer has a $100,000 loan. He refinances this into 2 loans

Split A $60,000

Split B $40,000

That is splitting a loan.



Why split?

The ATO allows a mixed loan to be split into its respective portions. This will then allow the borrower to pay off one portion independently of the other. Other reasons include

- Being able to link an offset account to the split portion

- To allow for debt recycling

- To allow for loan shuffling or debt shuffling

- Uses by different entities can be segregated

- To be able to fix different portions for different time periods.


‘Loan splits’ is a also a term for more than one loan secured against the same property.


Example

Homer borrows $500,000 to buy his main residence.

He splits it into 5 splits in anticipation of debt recycling in the future and to allow him to fix some of his loans.

This will mean he has 5 loans secured against the main residence which might look something like this:

Split A $100,000 variable

Split B $100,000 fixed for 2 years

Split C $100,000 fixed for 3 years

Split D $100,000 variable

Split E $100,000 variable

Homer could have had splits A, D and E all as one split, but by splitting it like this it allows him to fix D and D at different time points in the future.

 

Minor consideration: Note that lenders may charge a loan discharge fee per split - it's only a few hundred $ each but can add up if you're thinking of refinancing every few years.

 

The discharge relates to the mortgage. I haven't heard of lenders charging a discharge per loan.

 

Sorry, poor terminology on my part. CBA calls it "Settlement Fee (Discharge)", at Suncorp it's "Loan Finalisation Fee", for example. $350 per loan (ie per split) in each case. Doesn't look like Westpac or NAB have an equivalent fee for their current products.

 

@K3rmit is right. Whilst most lenders charge a fee to discharge a mortgage, Suncorp charges $350 per loan account (split). It can add up. Some of the non-conforming lenders do similar.

 

Anyone being charge such a fee should make a complaint as it is likely to be a breach of the nccp act