Arranging your Personal Home Loans

Do you have a loan on your personal home?  Now may be a good time to look at the best way to structure it.

It can be a good idea to split your home loan with a portion on revolving credit and the balance on a fixed term.  Revolving credit allows you to repay and redraw funds without having to negotiate terms with the bank.  However, as floating rates are risker as they can fluctuate, you may not want all of your borrowing to be on a revolving credit facility.  When determining the amount to have on your revolving credit facility, the ideal amount is what you would expect to be able to repay by the time the fixed loan comes up for renewal.

For example, let's say that you have a $200,000 loan, you want to fix most of that loan for 2 years, and that you calculate that you would be able to repay approximately $20,000 of debt each year.  In this case, it would be appropriate to put $40,000 of the total loan on a revolving credit facility.  The balance of $160,000 would be put on a fixed rate for 2 years.

As it can be quite difficult to make an accurate estimate of what debt you might be able to repay each year, another option is to split your fixed loans into several amounts and split them over various terms.  For the above example, you could split the remaining $160,000 into 4 equal amounts of $40,000 fixed for 2, 3, 4 & 5 years.

As a fixed loan will come up for renewal each year, you can simply refix by adjusting for the debt repaid that you over/under estimated.  For example, if you only ended up paying off $20,000 instead of the $40,000 that was esimated in the first 2 years, you could simply extent your revolving credit facility by $20,000 or refix the amount remaining.

The downside of splitting your loans so that the renewal dates are spread over several years comes if you decide to refinance to another Bank.  As you will never have all of your loans coming off their fixed terms at any one time if makes refinancing more difficult as there may be break fees involved.

Disclaimer: The above article is general in nature and we recommend you seek professional advice tailored to your specific personal situation.