If you’re shopping around for a home loan but can’t settle on whether a fixed interest rate or a variable interest rate would work better for you, there could be a solution – split home loans.
A split loan essentially allows you to use both interest rates. So, could it be the best of both worlds? Well, there are a few factors to consider.
To help you weigh up your options, we’ve put together this article that discusses:
- what a split home loan is;
- how fixed rates and variable rates work;
- how a split mortgage works; and
things to consider before opting for a split home loan.
What Is a Split Loan?
Contrary to what the name might lead you to believe, a split home loan is not a type of loan.
Instead, a split home loan refers to dividing a portion of the loan into two parts, each with a different interest rate: fixed or variable.
So, to understand what a split home loan is, you first need to understand the difference between a fixed and variable rate for home loans.
What Is a Fixed Rate Mortgage?
With a fixed rate home loan, the interest rate remains the same for the entire duration of the fixed term agreed on.
So, the interest rate you agree upon when signing on the dotted line is the interest rate maintained throughout your home loan’s lifetime.
A fixed-rate loan’s main advantage is that it gives you the certainty of what your repayments will cost for a while because your interest rate is guaranteed not to go up or down during the fixed term.
However, there’s always a chance that markets could go down, and you’ll be stuck with a higher interest rate.
Fixed rate home loans don’t offer some of the features that variable rate loans do, such as making additional payments to your principal, if they do, there would normally be a limit.
What Is a Variable Interest Rate?
A variable rate home loan means a fluctuating one – the interest rate rises and falls over the life of your mortgage.
Interest rates can change in response to the Reserve Bank changing the official cash rate, or it may merely be a business decision by your financial institution.
The main advantage of a variable rate loan is flexibility, but this won’t necessarily work if you’re on a tight budget and need your payments to stay constant.
This option commonly comes with beneficial features such as an offset account or a redraw facility.
So, How Does Splitting Your Home Loan Work?
Splitting your home loan offers borrowers the best of both fixed and variable rate worlds.
This strategy effectively splits a home loan into two completely separate loans. Most lenders will give you the freedom to choose how you would like to divide the split, for example, 60/40.
Each portion of the loan will have its own fixed and variable interest rate.
So, if you have a total home loan of $100,000 remaining and choose a split mortgage of 60/40, one portion of the loan amounting to $60,000 will charge interest at a fixed rate, and the other portion of the home loan amounting to $40,000 will have a variable rate that will fluctuate if interest rates rise or fall.
You then pay off those two loans concurrently through a split home loan. You can choose whether you would like the mortgage repayments to go off on the same day or not.
If you have extra money that you would like to contribute, you can do so into the variable rate home loan. Or, you can make use of the offset account or redraw facility for effective saving.
Things To Consider Before Opting for a Split Home Loan
The most obvious thing to consider is whether your chosen lender offers the option of splitting your home loan.
If they don’t and you have your heart set on a split mortgage, consider looking around for lenders that do and then compare prices and features.
Before deciding how you want to split your home loan, be sure to use a split loan calculator. You can either contact a mortgage broker for assistance or make use of an online split loan calculator. This way, you can determine which portion of the loan will require what repayments and interest rate.
If you are unsure about whether a variable or fixed interest rate is best for you, a split mortgage is a great option that provides flexibility. But, it could land up being more complex and costly in the long run to try and balance two different home loans at once.
When it comes to home buying, it’s always in your best interest to consult a mortgage broker before making any decisions, during the applications and throughout the loan duration.
To split your home loan, you need to begin by understanding the difference between fixed and variable interest rates.
A successful split home loan lies in using each of the interest rates to your advantage. Be sure to check what features are available to the borrower should you need them and make use of them appropriately.
For example, if you want to make additional payments, doing so into your fixed-rate loan account could result in penalty fees as it doesn’t offer those features.
As a borrower, it is always necessary to take advice from a mortgage broker when making large financial decisions.
At the Mortgage Agency, we specialise in determining:
- whether a split loan is a good option for you personally;
- the present market and whether a split loan is a good idea in the current climate; and
- how you should structure your fixed and variable rate percentages if you do choose a split loan.
Contact us today, and one of our experts can help you develop a personalised plan to best suit your financial needs and goals.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.