Find out how splitting your loan could help you make the most of a fixed and variable interest rate
04 February 2022|3 minute read
Home loans are a major financial commitment, so it’s important to find a mortgage repayment structure that really caters to your needs and financial circumstances.
While a traditional variable or fixed rate mortgage might be suitable for some borrowers, those looking for optimal flexibility and customisation might prefer a split rate home loan.
In this article, we’ll explain what a split rate home loan is, how it works, the pros and cons, and the other things to consider when splitting your home loan.
When you have a split rate home loan, one portion of your loan is charged interest at a variable rate, while the other portion is charged interest at a fixed rate.
This way, borrowers get to enjoy the benefits of both a fixed and variable rate home loan. You don’t need to split your loan into equal halves, you can choose a different ratio (e.g. 40% fixed, 60% variable).
The fixed portion of your loan guarantees more stability, while the variable portion allows for increased flexibility.
To get a better understanding of split rate loans, let’s take a look at an example.
Say you have an $800,000 home loan with a 30 year loan term and decide to split your loan 50:50. You fix $400,000 at 2.80% per year for a 2 year fixed period and put the remaining $400,000 at a variable rate of 2.50%.
Your monthly repayments would come to an approximate total of $3,224. This combines:
Now say that in 10 months time, the market changes and your lender increases your variable interest rate to 2.90%. Your monthly variable repayments would increase to $1,665, making your total monthly repayments $3,309.
While no one likes to see their home loan repayments increase, the increase would have been even larger had 50% of the home loan not been fixed.
Your fixed repayments remain the same over the duration of the fixed term, providing a constant that you can budget for.
On the other hand, if interest rates drop, it’s only the variable portion of the split loan that will see decreased repayments.
A split rate home loan can be a good option for the indecisive borrower who wants to make the most of what variable and fixed rate loans offer. Here are some of the benefits to splitting your home loan:
Despite the many advantages of a split loan, there are some drawbacks to be aware of:
It depends on your needs and preferences. Many borrowers like to split the loan 50:50, but you can split it in a different way.
For example, if you prefer the security of a fixed rate home loan but want to make full use of an offset account, you might prefer to split your loan into something like 80% fixed and 20% variable.
It’s a good idea to speak to a financial advisor or mortgage broker before splitting your home loan to decide if it’s a smart move for you.
Aussie’s brokers can walk you through the process and tell you more about your home loan options. Book an appointment today to find out more.
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