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When it comes to home loans, Australians have a lot of choices. You can go for a fixed interest rate, which gives you peace of mind that your repayments will stay the same for the duration of the loan. Or you could choose a variable interest rate, which means that your repayments will change in line with market fluctuations. But what if you can’t decide between the two? A split-loan could be the answer.
What is a split home loan?
A split home loan allows people to divide their mortgage into two parts: one fixed interest rate portion and one variable interest rate portion. With this option, your repayments will stay steady on the fixed part of your investment while giving you flexibility on the other half with an adjustable interest rate.
For example, for a $400,000 loan, you could have a 60/40 split, where 60% of the loan ($240,000) is charged on a fixed interest rate and the remaining 40% of the loan ($160,000) is charged on a variable interest rate.
If you think this option might be suitable to your circumstances, use our split loan calculator to get an understanding of which combination of fixed and variable rates may suit your needs best.
What are the benefits of a split home loan?
A split home loan allows a borrower to have the best of both worlds, as you can access the best features of fixed and variable products.
If you like the safety and security of knowing exactly what dollar amount will be owed each month, you can benefit from this on the portion of your loan that is charged at a fixed rate. If interest rates rise, your portion of the loan that is fixed will be protected, however, if rates drop, you miss out on the benefits of that.
When it comes to the variable portion of your loan, you can access all of the features associated with variable rate products, such as unlimited additional repayments on top of your minimum repayments (if your home loan allows for this). The ability to make extra repayments without incurring fees is attractive for many borrowers. As most fixed-rate products don’t allow for this, having a variable portion that allows for extra repayments to be made, free of any fees, can mean you pay off your home loan in significantly less time.
Other beneficial features you may have access to with a variable rate portion of your home loan will be redraw facilities or offset accounts (again if your home loan allows for this).
What are the main considerations
Deciding to split your loan is a personal decision and often it comes down to your individual circumstances rather than financial concerns. Before you decide to commit to a split-loan, consider:
- If you prefer the certainty of a fixed-rate home loan, that is, knowing the exact dollar amount of your repayment each month, or whether you’re not too concerned about interest rate changes and you’d prefer the added features and flexibility of a variable-rate loan.
- How long you can commit to a fixed-rate. Many fixed-rate products have a period from one to five years, so think about your personal circumstances, whether your financial situation is likely to change during that period, and consider what length of time you’re comfortable committing to, as there can be break-fees associated with ending your fixed-rate term early.
As with any home loan application, whether it’s your very first or you’re looking to refinance, it’s best to weigh up all your options and engage a mortgage broker to help you on your journey. If you have any further questions about split home loans, reach out to us today!
