When it comes to financing the purchase of a home, borrowers are often faced with the dilemma of choosing between a fixed-rate mortgage and a variable-rate mortgage. But what if there was a way to enjoy the benefits of both while mitigating their downsides?
Enter the split home loan – a financial arrangement that combines the stability of a fixed rate with the flexibility of a variable rate. As with any financial decision, there are both advantages and disadvantages to consider before committing to a split home loan.
What is a split rate home loan?
A split home loan typically divides the loan amount into two components: a fixed-rate portion and a variable-rate portion. The fixed-rate component remains steady for a predetermined period, often ranging from one to five years, shielding borrowers from fluctuations in interest rates during this time. On the other hand, the variable-rate component allows borrowers to capitalise on potential interest rate decreases, which may ultimately save them money.
What are the benefits of split rate home loans?
Rate stability: One of the primary attractions of a split home loan is its ability to provide borrowers with the best of both worlds. By allocating a portion of the loan to a fixed interest rate, homeowners can lock in a predictable repayment schedule for a specific duration, usually ranging from one to five years. This stability is particularly valuable during times of economic uncertainty when interest rates might fluctuate unexpectedly. So even if variable rates go up, borrowers will not be affected in this fixed portion of their split loan, softening the blow of any increase in interest rates.
Flexible repayments: If a portion of the loan is variable, borrowers will benefit from any relevant interest rate cuts the lender will make.
Flexible ratios: Individuals have the flexibility to adjust their split loan to their preferred ratio between fixed and variable options. Many borrowers like to split the loan 50:50, but it can be split in many different ways. For example, if you prefer the security of a fixed rate home loan but want to make use of an offset account, you might prefer to split your loan into something like 80% fixed and 20% variable. Or if the rates are on a downturn perhaps you'd like to capitalise on the interest by paying more of your loan, which means you might like to split your loan 60% variable and 40% fixed.
Offset accounts, extra repayments, redraw facility: On the variable side of their loan, borrowers can take advantage of features such as a linked offset account available with particular variable type products. Any money deposited into this account will be ‘offset’ against the loan, which can result in paying less in interest and shaving time off the life of the loan. Borrowers can also make unlimited extra home loan repayments and may be able to take advantage of a redraw facility.
Potential disadvantages of a split loan
While there are a great number of benefits, borrowers may wish to also consider the potential drawbacks of splitting their loan:
Potential missed opportunities for rate reductions: The dual nature of a split home loan can sometimes work against borrowers. If interest rates continue to decline during the fixed rate period, those with a larger fixed portion might miss out on potential reductions in interest rates where variable rate borrowers may reap the benefits. The fixed portion locks in a higher rate, which could end up costing more over time if variable rates remain low.
Limited flexibility: While split home loans offer flexibility compared to fully fixed loans, they still lack the complete adaptability of a purely variable loan. Borrowers may find themselves restricted by the terms of the fixed portion, preventing them from taking full advantage of lower interest rates or changing financial circumstances. There is also typically a cap on the maximum additional payments that borrowers are allowed to make towards the fixed portion of their loan.
Break fees: Usually there are break fees associated with fixed rate loans. Exiting a fixed-rate portion of a split home loan before the agreed-upon fixed term can incur break costs or early repayment fees. These charges can be substantial and may offset any potential benefits gained from fixing the interest rate. Changes in personal circumstances, such as selling the property or refinancing, could necessitate breaking the fixed term and incurring these costs.
The split home loan’s ability to provide stability during uncertain times, capitalise on favourable market conditions, and tailor the loan structure to individual preferences makes it an appealing choice for savvy borrowers. As there are benefits and downsides with any home loan arrangement, it’s important to find a loan that's right for you.
Our friendly lending experts are available to help guide you on your home loan journey. To book an obligation free appointment today, fill out the form below or call us on 13 61 91.
For a quick guide you can also try our split loan calculator, which can help you find the best combination of fixed and variable interest rates to suit your needs.