Q: I’m hearing a lot about split loans at the moment. With fixed rates this low, why would I split my mortgage into fixed and variable portions instead of getting a fixed interest loan?
A: A split home loan can be a very savvy way of getting the most out of your mortgage, especially when it looks like rate cuts are likely.
Essentially, a split home loan involves putting one part of your mortgage on a fixed interest rate with the other part of your home loan on a variable interest rate. So really, you are hedging your bets on interest rates and trying to get the most out of each type of home loan.
Since November 2011 a whopping 2.75% has been shaved off Australia’s cash rate. While not all of this has been passed on to customers, a lot of it has and those savings could have made a real difference to someone with a variable, or split, home loan.
Pros of fixed rates – You know exactly what your repayments will be and even if the cash rate rises your interest rate won’t, so you are protected from rate increases during the fixed term.
Cons of fixed rates – Typically you can’t make extra repayments on a fixed home loan, and if rates drop you won’t get to benefit! There can also be costly penalties if you want to break your fixed loan term early.
Cons of variable rates – While you may get the benefit of any rate cut, you will also be subject to any rate rises.
Split rate home loans
A split home loan gives you the best of both worlds. Fixed rates offer certainty about repayments, which is ideal for tight budgets, while also protecting against possible rate rises in the years ahead.
Variable home loans give flexibility to take advantage of low rates by making additional repayments to pay down your mortgage plus the benefit of any further rate drops if your lender passes them on.
It’s important to think about what home loan features would work best for you, e.g. a set interest rate with no risk of change, or the ability to pay down a mortgage early? Then you can work out which home loan type is right for you, or, split!
If you need help deciding, speak with an accredited mortgage broker who can tell you more about the features of fixed and variable rate loans. They can also compare the different rates and loans available to help you choose the home loan that’s right for you.
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