Split loans: what's the difference?

Amid all the excitement and fuss surrounding the official emergence of tracker mortgages in the Irish market, another less flashy structure has gone more or less unnoticed.

This little animal - the split-rate mortgage - may not be to everybody's taste but it could certainly provide a useful alternative for some homeloan-hunters, provided of course that they are willing to seek them out.

Split-rate mortgages work on a very simple principle whereby a borrower effectively breaks his or her mortgage into two pieces, applying a fixed rate to one part and a variable rate to the other.

They themselves will decide on the proportion of the loan they want to allocate to the fixed or variable rate, with the lender generally administering the whole thing as it would any other loan.

The appeal of the split-rate structure is also fairly easy to understand, with this kind of mortgage usually of most interest to borrowers who cannot quite decide on whether they want to fix their loan - and take comfort from the knowledge that their repayments will not vary for the term of the fix - or let it vary according to the decisions of the European Central Bank.

By taking a split-rate loan, they are effectively allowing themselves to avoid the decision and thus ensure that they will not be fully exposed to massive rises in eurozone interest rates should they occur. (For the record, this is not expected in the very near future, although nothing is ever completely certain in the crazy world of interest rates.)

Given all the angst that usually surrounds the "will I, won't I fix decision", it is perhaps a little bit curious that very few mortgage customers find themselves considering the split-rate loan as an option.

One obvious explanation for this is that they are unaware of its existence, particularly since lenders can be slow to highlight the option.

Mr Peter Bastable of mortgage advisory firm, Simply Mortgages, confirms that clients rarely ask about split rates when seeking a loan, with the result that the products are rarely issued.

He has concluded that there are a few major reasons for this near-death for the split-rate loan,with the low interest rates that have been in vogue across the euro zone in recent times at the top of the list.

"Variable rates have been so low in the last few years that fixing itself has been out of fashion, with the exception of the discounted new-business oneyear rates that are favoured by nearly every first-time buyer," he says.

Mr Bastable further suggests that this unwillingness to fix comes against a background where borrowers are more than conscious of the penalties that will apply if they try to exit a fixed-rate loan before its term has ended.

In other words, consumers are weighing up their finances and making an informed decision to take their chances with a variable loan.

Another potential problem for the split-rate is, according to Mr Bastable, the administrative problems that the products can create for lenders.

Not all computer systems like the notion of two loans in one, with the result that lenders find it easier when borrowers choose one or the other.

A new factor in the whole mortgage mix of course is the tracker - the product that promises to truly shake the foundations of the Irish homeloan market in 2004.

Mr Bastable is convinced that the "huge rise in popularity of the tracker across all borrower sectors" will in effect will kill off the concept of split rates.

Trackers are seen by many as a better bet than both fixed and variable loans, since they guarantee to stay within a fixed margin of the wider euro-zone interest rate for the life of the loan, thus ensuring an element of value for the consumer.

Those who do still fancy taking out a split-rate product should not despair however, with practically every institution in the market offering the facility in some form.

Mr Bastable says the only issue here is whether the lender offers the split as one loan or two. "It is just a simple case of packaging."