Using the split loan calculator
One of the most important things to consider in the buying process is whether you have the borrowing power or financial fuel to take out a home loan and be able to meet repayments throughout the total life of the loan.
However, what many borrowers don’t realise early on in the home loan application process, is that they ultimately have the freedom to structure their home loan product so that it will best suit their repayment goals and financial situation.
And an effective way to do this, is by splitting your home loan into two portions, or accounts, one being a fixed interest rate, and the other a variable interest rate. But why start sectioning off your home loan into different types rather than siding with just the one?
Firstly, why completely dive into a variable rate home loan if it can potentially lead to monthly repayments taking an uncomfortable hike, and more interest being paid down onto the loan? That’s if the Reserve Bank opts into increasing its cash rate, and thus interest rates rise.
But then, why take out a fixed rate home loan if it could leave you frozen on the sidelines, painfully watching on, unable to reap the benefits of tapping into an even lower interest rate than the one you’ve already locked yourself into? The double-edged sword leads many borrowers to beg the question: Which is the path least troublesome?
The reality is that there are cost-savings benefits inherent in both a fixed rate home loan and a variable rate home loan, as much as there are risks involved in each. But how about mixing it up, splitting your home loan between the both, and consequently, minimizing the riskier parts from potentially impacting the total amount that has been taken out on the home loan?
What is a split home loan?
Splitting your home loan doesn’t have to be a clean cut down the middle, but you can slice your loan whichever way you believe it will satisfy your finances, whether that be 50/50 variable rate and fixed rate, or 60% fixed rate and 40% variable rate.
The options are malleable, and how you prefer to go about splitting your home loan can be discussed with a qualified and professional mortgage broker or financial expert.
Although the power rests in the hands of the borrower in how they will decide to split their home loan, there are a few important aspects of servicing a split mortgage that need to be considered before it is made into a rock-solid deal with the lender, and these are explored further below.
However, to effectively split your home loan into multiple accounts so that the home loan works for you, rather than you trying to catch up with it, will ultimately come down to being able to strike the right balance between the flexibility that is brought on by a variable interest rate, and the security that is provided by a fixed interest rate.
It is also important to understand and gain professional financial advice on exactly how your chosen framework will go on to affect the mortgage at its very core. In other words, how it will determine the numbers; which includes your monthly repayments, the total amount of interest to be paid on the loan, the total term of the loan, as well as the restrictions that can prevent additional repayments from being put towards the loan.
Because, the most important questions to ask of any home loan product are: How much will this strategy, or home loan product, cost me in total? And how much will it cost me in interest?
Your Mortgage’s Split Loan Calculator is a great starting point for those who would like to understand how a split mortgage will affect their repayments and the total amount they will be required to pay towards the home loan.
Using the split loan calculator
Interest rates will significantly shape your home loan, even more so over a longer period of time, and knowing how you can make your home loan and interest rates get along could end up saving you thousands of dollars.
It may be brought to fruition that splitting your home loan is not a cost-effective strategy, so you will rather opt into a home loan product wherein the interest rate is entirely fixed, or entirely variable. It will all depend on what option puts more money back into your pocket and allows you to comfortably tend to home loan repayments.
Different loan types, including deciding on how much of your split home loan will be set to a fixed rate, and how much of it will be led by a variable rate, will weigh heavily on what is thrown once the numbers are crunched.
Your Mortgage’s Split Loan Calculator can help you in realising the most cost saving way to go about splitting your home loan between variable and fixed rates, or whether it is more opportune for you to sign into a solely variable, or solely fixed rate.
Firstly, you will need to provide the split loan calculator with the total amount to be taken out on the home loan, the total loan term, and the frequency of repayments (monthly, fortnightly or weekly).
Following this, you will need to input what amount, or portion of the home loan will be dictated by a fixed rate, at what percentage this fixed rate will be, and for how long this rate will be attached to the fixed portion of the loan.
The calculator will then apply the variable rate to the remaining portion of the loan, which is already pre-set by the calculator at 5.22% per annum, but this can be altered.
Now, let’s see what numbers can be thrown by the calculator for a total loan amount of $800,000.
We will set the loan term at 30 years, with payments running monthly. Let’s put $400,000 of the total amount of the loan at a fixed rate of 3.9% per annum, for 1 year. The remainder of the loan will be set at a variable rate of 5.22% per annum.
According to the calculator, the combined fixed and variable monthly repayments could potentially end up being $4,088.06, and the total amount of interest to be paid on the loan could be $778,316.07
After the fixed rate repayments come to an end after 1-year, monthly repayments could increase to $4,394.42, to be paid monthly throughout the remainder of the loan term.
However, if the entirety of the home loan was rather based on a variable interest rate of 5.22% per annum over 30-years, the total amount of interest to be paid on a $800,000 loan could end up reaching $784,999.45.
That’s a potential saving of $306.36 per month in repayments, and a potential saving of $6,683.38 in interest to be paid on the loan – that’s if the borrower opted into the split home loan instead of the variable.
If we were to set the calculator, so that the fixed portion of the home loan (applied to $400,000) carries over 5 years of the 30-year loan term, an astounding $31,866.40 could be saved in interest!
How to know if a split loan works for you
Designing a competitive home loan deal all comes down to seeing how the numbers will react to certain home loan types over a period of time.
You ideally want to provide the split loan calculator with a few variations in order to be able to compare the differences in repayments, and just how much you could end up saving in interest if you sided with a split mortgage compared to a variable one, or a variable mortgage compared to a split one.
The calculator is a useful starting point for those wanting to get an idea of how much they can be saving over the total term of the loan, but it is advised that borrowers engage a qualified and professional mortgage broker or financial adviser who is able to provide expert advice on what type of home loan will be most advantageous.
If opting into a split mortgage, a financial professional is also able to help you in best deciding what portion of the total loan to allocate to a variable rate, and what portion of the loan to lock into a fixed rate. It all depends on the bottom-line savings and understanding the limitations of both loan types.
The benefits of splitting
A split mortgage helps you gain the benefits of both a variable and fixed rate home loan, whilst also minimizing the risks of each option, simply because each interest rate type is not attached to the entire amount of the loan.
Knowing that a portion of your loan is to be secured in a fixed rate will mean that the repayments attached to this account will be expected and predictable, and any interest rates fluctuations that may occur won’t impact or change these set repayments. This is particularly useful for those who are juggling other finances and want to remain organised and prepared.
On the other hand, having the other portion of your home loan set to the variable rate will allow you to remain flexible, especially important if the standard variable rate dips even lower, allowing you to tap into it, take advantage, and cut costs.
Furthermore, in a split mortgage, if the interest rate rises, it won’t affect the entirety of your home loan, but rather a slice of it. This ultimately means that repayments won’t increase as significantly as they could have if the entire amount of the home loan was set to the variable rate.
Understanding fixed period
Whilst splitting your home loan has its advantages, setting a portion of your home loan to a fixed rate can not only leave you barred from tapping into a lower interest rate if the Reserve Bank calls it, but it can also lock you out of the certain perks that often come with a variable rate.
Firstly, you will not be able to open an offset account on the fixed portion of the home loan, only the variable portion, meaning you are not able to save on interest on the fixed amount through this means.
Secondly, if you happen to pay off your home loan sooner than expected, you may be charged a break fee on the fixed portion, also applicable if you wish to switch lenders during the fixed rate period.
Furthermore, you can only make unlimited extra repayments on the variable portion of the loan, not the fixed portion, a restriction that can go on to impact how quickly the entire loan is paid off and the total amount of interest paid.
Also, certain fees and charges apply differently, depending on each loan product. This includes the up-front fees and ongoing fees that are attached to fixed and variable home loans. How these costs can vary should be considered by the borrower when wanting to make an informed, cost-effective decision.
About this calculator
The results provided by the calculator are to be taken as a reference or guide only. Results only rely on the information provided. It should also be noted that results do not indicate a suitable home loan type for a buyer, nor do they act as a determiner. A formal assessment should be independently sourced, ideally in consultation with a financial adviser and/or mortgage broker.