Not sure whether you should choose a fixed rate or a variable rate home loan? Why not choose both, with a split rate home loan!
Fixed vs variable home loans
When choosing a home loan, you can often choose between two different types of interest rates: Fixed and variable. These interest rates each come with a number of benefits to suit different people:
Variable rates allow your interest to change alongside market movements, which in a falling market means you can get cheaper repayments;
Fixed rates offer more secure and predictable repayment, and in a rising housing market, can help keep your repayments low when others are increasing.
While each of these rates can be beneficial, neither is perfect. That’s why you can choose a split rate home loan, to get the best of both worlds.
Read: Pros and Cons of a Variable vs Fixed Home Loan
What is a split home loan?
A split rate home loan on the other hand is a combination of the two, allowing you to ‘split’ your interest rate into multiple separate accounts. The most common is to have two accounts, with one being a fixed interest rate and the other being variable, enabling you to receive the benefits (also the drawbacks) of each loan type.
These splits don’t have to be even either. You can do a 60:40 split for example where 60% of the loan has variable repayments, and 40% are fixed. All in all, split home loans are a flexible loan type, and have several advantages which we’ll explain below.
5 reasons to split your loan
#1: You can get the benefit of falling interest rates
If you have a portion of your loan as variable, then if your lender reduces the loan’s interest rate, you'll get some of that benefit. For example, let’s say you have a $400,000 loan with a 50;50 split, and your variable interest component is 2.50% p.a.
If your lender were to drop the variable interest rate by 25 basis points, half of your loan ($200,000) would now have an interest rate of 2.25% p.a. This would reduce that half of your repayments from $790 per month to $764 per month - overall savings of nearly $10,000 over 30 years.
#2: You can avoid rising interest rates (sort of)
Let’s use that example again, only this time interest rates are moving up. If your lender decides to hike that 2.50% p.a interest rate to 2.75% p.a, then you’d be paying much more on a variable rate loan. But, let’s say half your loan is split again, at a fixed interest rate of 2.60% p.a.
This would mean that $200,000 would stay at repayments of 2.60% p.a no matter what, meaning repayments for that half of the loan is around $800 per month. The variable component meanwhile increases to $816.50 per month, which would cost more than $5,000 extra overall. The savings would be greater if a bigger portion of your loan was fixed.
#3: They’re adjustable to your preferences
As mentioned earlier, split home loans can be adjusted depending on what your preference is. While you can go with a standard 50:50 split, if you prefer variable loans but want some of it to be securely fixed, you could go for a 60:40 split, a 70:30 or even an 80:20. It all depends on your individual preference, and what the lender will allow. Make sure you speak to your lender about how you can structure your split home loan.
#4: You can still make additional repayments and enjoy home loan features
On the variable side of the loan, you can still take advantage of the usual bonus features, such as a redraw offset facility. With this facility, you can make unlimited extra repayments into it, reducing the size of the loan more quickly. The bigger the variable portion, the more you can take advantage of such features.
Calculate your repayments here
#5: You can still enjoy competitive interest rates
The good thing about interest rates at the moment is that both types - fixed and variable - are at record lows at the moment, meaning you can access both at a low rate for either when splitting your loan.
It’s worth remembering too that at the end of the fixed-rate period, the fixed interest rate can revert to the lender’s standard variable rate, which might be higher than what your current variable rate is. When this happens, you’ll probably want to refinance to a lower one.
loans.com.au has recently released a new product with rates under 2%. Learn more about our Smart Booster Home Loan here.
Split your loan with loans.com.au
At loans.com.au we are offer low fixed and variable rates. We also offer split loan facilities too, meaning you can take advantage of both of these extremely low rates to save on your home loan at your own discretion.
Submit your application using the button below and one of our friendly lending specialists will give you a call to see how a split home loan could benefit you.