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:
A fixed rate loan offers predictable mortgage repayments because the interest rate is locked-in for an agreed period of time. The rate is not affected by economic or financial factors which could cause your lender to change their variable rate. This makes your household budgeting a lot easier.
Fixed rates offer more secure and predictable repayment, and in a rising housing market, can help keep your repayments low when others are increasing.
However, when the variable interest rate goes down, you won’t get savings. Fixed rate loans also don’t come with an offset sub-account and you can’t make additional repayments. If you decide to terminate the fixed rate loan during the fixed period you will need to pay penalties which can be substantial. Once the fixed rate period ends, your interest rate reverts to a variable rate loan.
Variable rates allow your interest to change alongside market movements, which in a falling market means you can get cheaper repayments;
With a variable rate loan, your interest rate can go up and down according to various factors. This means your repayments can increase or decrease over the life of your loan.
On the upside, variable rate loans offer more flexible features such as the ability to access your offset sub-account and make additional repayments without any penalty. You will enjoy lower repayments if the interest rate decreases, but you also have the risk of an increased repayment if interest rates rise.
If you’re torn between the two interest rate types, a split rate loan can be an ideal choice. With a split rate loan you can fix one portion of your loan, and the other portion can be variable. How you wish to split your loan is entirely your decision.
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.
For example, you have a home loan balance of $350,000. You decide to split your loan by 20/80 then 80% or $280,000 will be variable and the remaining 20% or $70,000 will be fixed for a time.
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.
A split rate facility can be added to your existing or new loan product. You can ask our lending specialist today to add this loan feature so you can get the best of both worlds.
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.
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.
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.
On the variable side of the loan, you can still take advantage of the usual bonus features, such as an offset sub-account. 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.
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.
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.