Getting a Home Loan in Australia if you're living overs...
29 Nov 2023
Splitting your home loan lets you reap the benefits of a variable rate where you can make additional repayments and get access to your offset sub-account. It allows you to minimise the risk of increased repayments by fixing a portion of your loan.
If you’re tossing up between choosing a fixed or variable rate home loan, a split loan may be a great alternative. A split home loan allows you to tap into the benefits of both fixed and variable rate home loans by essentially ‘splitting’ your home loan into two or more parts.
A split rate home loan is a hybrid of both fixed and variable rate home loans. A split loan allows you to ‘split’ your mortgage into separate accounts. The most common type of split loan would see you having two accounts - one with a fixed interest rate and the other with a variable rate. This can enable you to take advantage of the benefits (but also the drawbacks) of both types of loans.
With a loans.com.au split home loan, you can choose whatever split you’d like. Whether you want it to be an even 50:50 split down the middle, a 60:40 split or even an 80:20 split. To give you an idea of what this might look like, let’s use a hypothetical example below.
Let’s say you have a $500,000 home loan which you decide to split 50:50. In this case, a fixed rate would be charged on $250,000 and a variable rate would be charged on the remaining $250,000. However, if you instead chose to split your home loan 60:40; a fixed rate would be charged on $300,000 and a variable rate would be charged on the other $200,000.
If you have a portion of your loan that is variable, you will benefit from any applicable interest rate cuts your lender makes.
For example, let’s say you have a $400,000 loan with a 50:50 split and your variable interest rate is 2.50% p.a. If your lender cut its variable interest rate by 25 basis points, $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.
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, you’d be paying more on a variable rate loan.
But with your fixed portion of your loan, your repayments will remain the same. This means you can somewhat soften the blow of rising interest rates.
As mentioned earlier, you can split your loan however you want. While you can go for the standard 50:50 split, you have a number of options. It all depends on your individual preferences. If you prefer security but want some flexibility, you could split in favour of a fixed rate. On the other hand, if you want to stash as much away in an offset account that you can, you may favour a variable rate in your split loan structure.
On the variable side of your loan, you can take advantage of the usual features such as a linked offset account. Any money you deposit into this account will be ‘offset’ against your loan, which can see you paying less in interest and shaving time off the life of your loan. You can also make unlimited extra home loan repayments and you may be able to take advantage of a redraw facility.
The good thing about interest rates at the moment is that both types - fixed and variable - are at record lows, meaning you can access both options at a low rate when splitting your loan.
It’s worth remembering that at the end of the fixed-rate period, the interest rate will revert to the lender’s standard variable rate. This may end up being higher than the fixed rate you were paying, which should be accounted for when splitting.
While there are some attractive benefits, you should also consider the potential downsides of splitting your loan. While you will inherit the benefits of having a fixed and variable rate, you can still be faced with the downsides. Some of these could include:
You are still able to be affected by interest rate rises on the variable portion of your loan. This may mean that you will need to make larger repayments.
Your fixed rate period will end, and your repayments will likely increase at this point. However, you can choose to fix your interest rate again if you wish.
If you choose to break your fixed rate loan, you could incur break fees.
A split home loan may be suitable for you if you’re feeling nervous about the current interest rate cycle. As in, you feel that an interest rate hike may be incoming. With a split loan, you can partially protect yourself from any interest rate increases that may come into effect during the fixed-rate period.
At the same time, a split home loan may also work best for you if you’re looking for both flexibility and security. Variable home loans come with attractive perks that make repaying your loan more flexible; for example, you can store money away in an offset account and save on interest charges. Fixed home loans are great for security and planning as you know exactly how much your repayments will be each month and can budget accordingly.
With a split loan, you can access the best of both worlds and reap the benefits of fixed and variable rates, while often minimising your risks. If your fixed rate period ends, you can potentially choose to fix it again or revert back to the variable rate available at the time.
If you’re thinking about splitting your home loan, speak to a loans.com.au home lending specialist today.
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