Taking on a home loan is a big financial commitment. Having the borrowing power to take out a home loan and being able to make loan repayments for the entire loan term are both big financial responsibilities.
Many new homeowners might not know they have the freedom to structure their home loan however it suits their repayment goals and financial situation. One way of doing so is by splitting your home loan into two portions, one with a fixed interest rate and the other with a variable interest rate.
There are a few reasons this can be helpful. Having a fixed interest rate secured can save you from an interest rate hike, which could make affording your loan repayments uncomfortable. But at the same time, if interest rates were to fall, you can reap this benefit with the variable side of things.
Interest rate changes can seem like a double-edged sword, with risks involved on either side of the fence. The reality is that there are cost-saving benefits and drawbacks to both fixed-rate and variable rate home loans, so it’s possible that mixing it up by splitting your home loan could minimise the riskier parts of the equation.
What is a split home loan?
A split home loan isn’t technically a loan, it’s an interest rate structure where one portion of the home loan is fixed and the other portion is variable.
The split doesn’t need to be straight down the middle. You can choose to split your mortgage 50% fixed and 50% variable, or even 60% fixed and 40% variable. The way you structure it is up to you.
There are a few important aspects of a split home loan that should be considered before sealing the deal.
The flexibility of a variable interest rate and the security of a fixed interest rate means you might need to strike the right balance between these two sides of the same coin. In essence, it’s important to consider how splitting your home loan is going to affect the total cost of the loan. Considerable costs could include how much your monthly repayments will be, how much interest you can expect to pay, plus whether any other restrictions will be imposed on the loan (like the ability to make extra repayments or lump sum payments in the future).
Your Mortgage’s Split Loan Calculator is a great tool for people that want to get an idea of how a split home loan will work for them.
Using the split loan calculator
The interest rate you’re charged will significantly influence how much you end up paying back on your home loan. Having a lower interest rate on your mortgage can end up saving you thousands of dollars in the long run.
Using Your Mortgage’s Split Loan Calculator can be helpful when deciding how you want to split a home loan, including whether you want to lean more towards a fixed rate, a variable rate, or neither.
You will need to have the following information handy to use the Split Loan Calculator.
To give you an idea of what this might look like, let’s look at an example of an $800,000 mortgage.
For simplicity, let’s split the $800,000 straight down the middle into two $400,000 portions. The fixed portion will have an interest rate of 3.9% p.a. for one year, with the remainder to be set at 5.22% p.a. The total loan term will be 30 years and repayments will be made monthly.
According to the calculator, the combined fixed and variable repayments would be $4,088.08, with the total amount of interest coming in at $778,316.07. After the fixed-rate period ends, monthly repayments increase to $4,394.42 for the rest of the loan term.
If the entire loan was based on the variable interest rate, the total amount of interest paid would reach $784,999.45, meaning splitting the loan would save $6,683.38 over the entire loan.
If in this same example, the fixed-rate period was five years instead of one year, you would save $31,866.40 in interest.
How to know if a split loan works for you
It will all ultimately come down to the numbers when deciding whether a split home loan is right for you. Ideally, you want to know how much you’ll be saving in interest if you split it, and whether a fixed or variable interest rate is going to be more favourable.
The calculator is a useful starting point, but it’s advised that borrowers speak to a qualified and professional mortgage broker or financial adviser that can give expert advice on what option will be most beneficial.
If you decide you want to split your mortgage, a professional can advise you on what portion you want to have a fixed rate and what portion to have a variable rate. It’s important to understand the benefits, but also the limitations of both loan types.
Why should I split my home loan?
Splitting your home loan allows you to benefit from a variable and a fixed rate home loan, whilst minimising the risks involved in doing so.
Having a portion of the home loan secured in a fixed rate means there will be a level of security and predictability in your repayment schedule, and any rate hikes will not impact this rate. On the other hand, the portion of your mortgage that has a variable rate means you can remain somewhat flexible, and if the standard variable rate dips you can take advantage and cut costs.
Essentially, if the interest rate rises, you won’t be as harshly affected. At the same time, if the interest rate falls, you won’t be kicking yourself for missing out
Understanding the fixed period
It’s important to understand that despite these benefits, having a fixed interest rate on a portion of your home loan means if interest rates drop, or if there are other incentives offered under variable rates that suit your financial needs, you won’t be able to tap into these.
With a fixed home loan, you can’t use an offset account to save on interest on this portion of your loan. You might also get charged a break fee if you pay off your loan early, and if you choose to switch lenders during the fixed-rate period, you can also be penalised.
Using a variable interest rate on your home loan means you can typically make unlimited extra repayments, but fixed rates usually restrict your contributions to your standard monthly repayments. This can impact how quickly you can pay off your mortgage, as well as how much interest you end up paying.
It’s also important to understand that there fees and charges can apply differently to different loan types. This could include upfront fees, as well as ongoing fees, that are attached to each home loan. Understanding these costs is an important consideration when wanting to make the decision that suits your needs best.