Struggling to decide between a variable of fixed rate for your mortgage? Most home loans will allow you to divide your interest rate into several variable and fixed portions with something called split home loans.
What is a split rate home loan?
A split rate home loan results in splitting portions of your loan principal (the amount you’ve borrowed) into separate home loan accounts with differing types of interest rates. You’re able to divide your loan into a 50/50 split between variable or fixed rates, or you can opt to divide it into an 70/30 split etc. There are a few lenders who will let you divide your loan several times.
A split rate home loan will enable you to make use of certain benefits of both variable and fixed rates. If your lender were to cut the rates, you can expect to see the variable portion of your loan to drop. However, if rates were to rise, the fixed portion of your loan would remain at the lower of the rates (only because fixed rates stay the same).
Steve opts for a split loan:
Steve is talking to his lender about split loan options. He needs to borrow $600,000 and is looking to get both repayment certainty with the flexibility to contribute additional repayments as well as putting funds into a 100% offset account.
Steve decides he’s going to divide his loan into a 50/50 split, putting $300,000 towards a variable rate portion that has an offset account and another $300,000 into a fixed rate account. Steve also decides to put $100,000 of his own savings into the offset account, which lowers his variable loan principal to $200,000.
How does a split facility work?
Splitting your loan is pretty simple stuff, yet you’re able to perform sophisticated splits with the help of a broker or split calculator.
- Use a split facility to find your loan. Splitting your loan isn’t an option that is available for every mortgage. Make sure you’ve taken a look to see if your does and if not, talk to your lender about making an exception or think about refinancing to a loan that will allow you to split.
- What are your split portions? Depending on how you want to structure your loan, you can split your mortgage in any way you want.
- Make repayments. When your loan is divided into its portions, you’re able to make repayments into either the fixed or variable portions of the loan like you normally would. If extra repayments on your variable portion are available, consider paying some towards it out of your own money to pay off the loan quicker.
- Monitor your rates. During the fixed period, your fixed rate portion won’t change. However, your variable portion is subject to change at any point in time, so ensure you keep an eye on your variable rate. If the variable rate becomes too expensive, you might need to think about refinancing. Just be aware that you could be subject to breaking costs if you end a fixed rate before the fixed period ends, which could end up being very costly for you.
Split loan calculator
It’s a good idea to use a split loan calculator so you can gain a rough estimate of the benefits and costs should you split your loan. If you decide to use the split loan calculator, give careful attention towards any information you include. Whatever number you put into the calculator will correlate with the final calculation, so even the smallest error could make a huge change to the end result. So, if you’re seemingly unsure about some of the figures you need, make sure you find what they are. If unable to, use the closest figures you have available.
For example, if you’re paying $260,000 every month. The calculator will automatically give you the required fixed repayment, which in this example is $1,100. Repayments on the variable rate would be $761, so thus the monthly total worth of repayments would sit around $1,861 leaving you with $432,750 total to pay in interest. Once you’ve figured out how much you need to pay in regards to the split, you should possess a decent understanding around how split loans can be beneficial for you.
Reasons you should split your rate.
- Offers flexibility and certainty. Getting a split rate will provide you with the flexibility to benefit from a few of the features offered on a variable rate as well as a potential reduction in repayments should the variable rate decrease, whilst giving you the certainty that the fixed portion of your loan will not be affected by any rise in interest rates.
- Being certain of repayments. The fixed portion of your loan will lock in that rate for the duration of the fixed period. Within the fixed period, your interest rates, and thus your repayments, will remain the same as they are unaffected by any changes. This can give borrowers who are looking to plan and budget everything great confidence in the fact that interest rate increases will not affect the fixed portion of their loan.
- Extra repayments and offset accounts. If the variable portion of your loan will let you make extra repayments or have an offset account, you’re able to use extra funds to pay off the loan principal a lot quicker.
- More options. Opting with a split facility will grant you more options with your mortgage, which’ll let you manage your splits closely to effectively make use of them to their full potential.
How will a broker assist me?
You’ll find that mortgage brokers are quite the home loan specialists as they’re able to aid you in designing a mortgage split that fits your current situation as well as your needs and wants. Brokers are useful when it comes to calculating your splits or knowing the benefits as those things can seem quite daunting to your average borrower. Broker services are normally free of charge as their commission is normally given to them by the lender, not from you, the borrower.