||With interest rates at an all-time low, you are probably wondering whether now is a good time to fix your rate or will the variable rate drop even further. With a split home loan, you can ‘hedge your bets’ and get the best of both worlds as you are able to keep one portion of your loan on a fixed rate while the other remains on a variable rate.
What is a split home loan?
A split home loan allows you to have one portion of your loan amount on a fixed rate while the other portion is on a variable rate. Many people choose to split their home loan 50/50 however you can opt for a split amount that will suit your needs.
What are the benefits of a split loan?
- You have the security of knowing what your repayment will be on the fixed rate portion
- You are protected against any interest rate rises on the fixed rate portion
- Added flexibility on the variable rate portion to make unlimited additional repayments if you want to
- If interest rates continue to fall, you still reap some of the benefits on your variable rate portion
Why is splitting your home loan a good option?
By splitting your home loan, you can put yourself in a good position to pay off your mortgage sooner, especially if interest rates continue to drop.
Here is an example of how you can save by splitting your home loan:
Mr & Mrs Smith currently have a standard variable loan of $420,000 with a variable rate of 4.41% with minimum monthly repayments at $2313 per month and a remaining term of 25 years.
They are considering fixing $400,000 of their loan for 2 years at a rate of 3.75% which will result in a minimum monthly repayment amount of $2,056. The remaining $20,000 will stay on their current variable rate of 4.41% however the minimum monthly repayments on this portion will be $110/month
The new total minimum monthly repayment will be $2,166. This is a saving of $147/month compared to their original loan repayment of $2,313 per month. Over the 2 year fixed term this could potentially save them $3,528.
Here’s where the big savings can happen by splitting your loan...
Mr & Mrs Smith originally budgeted for a loan repayment of $2,313 per month, if they continued to pay this amount with $110 per month going to the variable split and $2,203 going to the fixed rate split. They could potentially save approx. $26,000 in interest over the 2 year fixed period and save 2.4 years off their loan term (see example below).
Some lenders may allow you to pay extra into your loan if your loan is on a fixed rate, before break costs may be applicable. This gives you the opportunity to save even more interest and term on your loan.
No one can accurately predict how interest rates will move. By splitting your loan you give yourself the opportunity of having the best of both worlds. Check with your lender if they offer this feature and also ask what costs are involved.