The most important thing you will do when climbing the steps towards owning your first home is to take out a mortgage, and deciding on which type of loan you will sign into comes second to that.
The stress may be induced by the uncertainty of the decision ahead; why choose a variable interest rate loan if it can potentially take you on an unpredictable roller-coaster ride if interest rates rise? But then, why take out a fixed loan if it could leave you wringing your hands if interest rates take a significant dip and you’re paying more for your mortgage that you could be?
It’s understandable to always want to avoid interest rate’s changing face, and those unforeseen financial hurdles, whilst also looking to reap as many cost-saving strategies and benefits as possible.
But if you’ve found yourself caught in limbo between fixed and variable avenues, there’s always the option to split your loan and get the best of both worlds.
What is a split home loan?
A split loan is exactly what it sounds like – a “split” of two interest rates, part fixed and part variable.
Split doesn’t always have to mean down the middle. Borrowers are able to split their home loan in whichever fraction they see fit, and in many ways than one, as long as the bank approves it. So whether you decide on, say 50/50 variable and fixed, or 70% fixed and 30% variable, it can all be discussed with your broker or lender.
Splitting your home loan into different accounts, and then deciding which accounts will constitute a variable rate, and which part fixed, can hand down a number of cost-saving benefits. Not to forget to mention, a balance between security and flexibility.
The benefits of splitting
One of the most recognised perks of splitting your home loan is that you get financial security, partly from the fixed side of the partnership. A fixed loan allows you to be locked into an interest rate, and no matter if the Reserve Bank increases its cash rate, your sturdy rate will not flutter or take a rise with it. Therefore, if juggling monthly bills, tending to debt or running a household, having a fixed rate is both predictable and secure.
In addition to this, your mortgage is also signed into the flexibility offered by a variable interest rate; the second benefit of splitting. Although your interest rate is dictated by the Reserve Bank and your lender’s choice to adhere to its changes, the nature of a variable loan hands down a few additional benefits also.
You have the option to offset your account, which can save you interest, and the option to make additional repayments without incurring a break cost, meaning you are given the opportunity to pay off the loan faster. Further to this, a variable rate also allows you to redraw on additional payments if your financial circumstances ever call for it.
And the last, most noteworthy benefit of splitting your loan between variable and fixed is that you avoid being entirely exposed to the risks associated with siding with just one option.
For instance, if the bank happened to increase its variable interest rate and you were only signed into a variable mortgage, then your monthly repayments would grow to be substantially higher than if say only 50% or 30% of your loan was variable (the rest being fixed). In noting this, having a split loan allows you to avoid the fuller punch of a potential interest rate rise.
Things to be mindful of when splitting
It’s important to also understand the ways in which splitting your home loan may impede you paying off your loan, and getting there faster.
First off, if a portion of your loan is fixed, you won’t be able to take advantage of a dip in the interest rate if that occurs – and it can be an eyesore to see the interest rate fall significantly lower than what you’re fixed into.
A fixed rate also bars you out of certain opportunities. For instance, you may not be able to open an offset account to save on interest against the fixed portion of the loan, and you could be charged a break fee if you happen to pay off your mortgage quicker or want to switch lenders during the time you’re signed into the fixed rate, which is usually anywhere between 1 to 5 years.
Lastly, if a portion of your loan is variable, your monthly repayments could fluctuate depending on what rates the Reserve Bank announces and whether your lender will follow suit, especially inconvenient when the rate takes a steep increase.
Although there are certain aspects of splitting a home loan to be mindful of, its underlining benefit rests on the fact that you’re given the option to sign into both a fixed and variable interest rate, thus minimizing the financial risks, set-backs and uncertainties that can sometimes come with signing entirely into one option.
It’s advised to discuss options with your broker or bank, as benefits and interest rate options do vary from lender to lender, but it does depend on what you wish to achieve; whether that’s to pay the loan off quicker or for your repayments to be instilled with security.