Split mortgages – for when nothing else might work

We have said in the past that split mortgages are not all they are cracked up to be, but they do have a place. We even made a nifty calculator to help people see what the results of doing this might be.

The problem with them is two fold, first of all they don’t necessarily work, second is that it is going to be refused unless you can’t even service the interest. Splitting a mortgage requires that the non-warehoused bit is on full repayment, so in 20 years time you might owe half of the original loan (assuming you never ‘un-warehouse any of it), but if you can service interest and keep going then you won’t get one.

Doing this can make sense though, even if the other part of the loan isn’t amortizing because in this situation at least your future debt isn’t stagnant, it’s reducing. The banks are blocking these though, because they have no ‘borrower solvency agenda’ they have only the ‘collect to the point of the person going bang’ agenda.

See the image above, this is an example of the type of correspondence which supports this view. The borrower specifically states that “Before you start filling it out I think it is best for us to have a further chat on same as getting a split on these loans would only be considered if you were unable to service interest only and based on the information you have provided to date on the rental income I am unsure if this is the case as they appear to generate enough income.”

If you happen to want to pay your taxes, NPPR, property tax and PRTB then being able to cover the interest means you have to be making well above the interest only repayment, don’t forget that even if interest and rent match that 25% of that rent is viewed as ‘income’ albeit unrealisable income. We have covered this before, demonstrating that you can have tax liabilities on negative cash-flows. This can occur on any type of mortgage, repayment or interest only.

So a borrower might want a split as a way to stand a chance and to remain solvent and not cross the tax authority, well, too bad, the bank want their money.

If you happen to be in a position where a split mortgage will keep you solvent and keep Revenue off your back then you better be unable to service the interest only, so welcome to the murky world of ‘advanced forbearance’ where almost nothing makes any sense.

One Comment

  1. M. Bailey

    Well Said Karl, how can a loan be long term sustainable if you can only pay the interest. The banks only long term plan is for the market to recover, which is years off.
    And, if people are struggling with interest rates being at an all time low, what do the banks do when interest rates rise, again they have no plan to that either.

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