Typically, the standard approach to financing a new home in Australia is to take one home loan for the entire cost. While setting up just one loan is simpler and more common, there are a few situations when two loans end up cheaper than one. Here are some of the benefits of taking out two loans instead of just one.
Smaller Loans Can Have a Lower Interest Rate
Lenders often charge a higher interest for a large home loan than a small home loan. This is because the larger loan is riskier since it’s for money. It’s standard industry practice for lenders to increase your interest rate based on how much you’re borrowing.
By splitting the cost of your home into two smaller loans, you might be able to borrow the same amount of money, but at a lower interest rate. For example, instead of taking one loan for $1 million at 6 per cent, you get two $500,000 loans at 5.5 per cent. If the numbers work out this way, and sometimes they do, you’ll end up paying much less in interest by taking out two loans.
When considering taking out a home loan, it is always important that you shop around to get the best interest rate possible. Here are a few places where you can start your research:
- St George Home Loans
- Home Loans BankSA
- No Deposit Home Loans
Use Two Loans to Reduce Your Down Payment
Larger home loans often require a larger upfront down payment than smaller loans for the same reason they charge a higher interest rate. Since the lender is taking on a bigger risk, they want to see more money upfront. You may be able to use the same strategy of taking out two smaller home loans to reduce your total down payment. This way you can buy your new home while spending less money upfront.
Max Out a Deal and Use a Second Loan for the Rest
One other situation where you can benefit from two home loans is if you find a lender giving out a great deal on a home loan, but the loan won’t be enough to cover the full cost of your property. In this case, you may want to borrow as much money as possible at the good rate then borrow whatever else you need with a second loan. Though this is a bit more work, but the financing will end up cheaper than if you had just borrowed all the money through one standard home loan.
What’s the Catch?
Taking out two home loans instead of one does have a few disadvantages. This is why not every Australian homeowner is using this strategy. The main problem with taking out two home loans is that each loan will charge a number of fees to get started. Lenders charge an application fee, a credit review fee, and start up fees to get a new home loan up and running. These costs can be fairly high and may erase any financial benefit of taking out two loans. In addition, keeping track of two loans is more work and increases the chance you’ll make a mistake, like missing a payment or paying off a loan too early. Both errors would lead to costly penalties. You need to consider these disadvantages before deciding whether two home loans is a good idea.
The strategy of taking out two home loans doesn’t work for everyone, but it’s definitely worth considering for your financing. If the numbers work out in your favour, you’ll be glad you considered this outside-the-box idea.
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This was a blog post by Lara Seers. Lara is a real estate agent for properties in Queensland. She is a professional finance writer specialising in home financing across Australia.
Photo by: Woodleywonderworks