Defining Split Home Loans

Many potential borrowers are still suspicious of mortgages and the entire application process. This doubt mainly revolves around choosing between a fixed or variable interest rate loan. However, with the arrival of split home loans, the perfect combination of both rates is at every homebuyer’s fingertips. 

What does it mean to have a split home loan?

Say you have a $500,000 home loan and you decide to split it 50/50. In such a case,  you will be left with two mortgages - one with a fixed, and the other with a variable interest rate. Splitting your mortgage loan in two will ensure you wholesome protection against skyrocketing interest rates. This will help you steer clear of rates escalating from, say, 2.50% to 4.00%, as the rise may also affect your payments.

If half of your mortgage does come off and you have to refix it - assuming it jumped from 2.50% to 4.00% - you will be left with the other mortgage loan half at a lower rate. Basically, rather than have your whole mortgage jump up in one go along with the interest rate, you’ll have half of your mortgage still locked on a lower rate.

The other half of your mortgage will, in the meantime, transition to a higher rate. Now, the loan can also be split into three or four accounts, yet most Australian borrowers prefer splitting them in half.

Is a split loan a good option to consider?

Well, that depends on what you are looking for out of a mortgage. If you want a portion of fixed and variable rates, then it is an excellent option to consider. On one hand, the fixed loan provides you with loan stability, whereas the variable half offers you more flexibility in paying off the loan quicker.

Now, if you have an investment property, a split home loan is an excellent option to use. This is so as the loan shows you the loan half that has deductible debt and the one that does not.

Fixed vs variable loan portion: What both offer

Australian borrowers typically lock the fixed-rate loan portion for up to one, three, or five years. The great thing about this is that the interest rate won’t change during the lockdown years. For example, if your loan is $200,000 and you fixed it for the next two years, the fluctuation on the interest rate will not affect your mortgage loan’s interest.

On the other hand, the interest rate of the variable loan portion is set by the bank or other lender type. This means that, if the interest rates go up on the market, the lender has the right to require the borrowers to pay a greater interest rate, as per the recent changes. However, the flexibility of variable rates allows borrowers to make unlimited repayments and also have an offset account as a way to save money.

What are the pros and cons of having a split home loan?

There are many benefits Australian borrowers can enjoy by splitting their loan into two a variable and a fixed portion, as follow:

• Split home loans offer security. When splitting your home loan into two parts, you have a variable and a fixed-rate loan. The fixed-rate loan is locked so that it protects you from higher interest rates in the future, while the variable-rate loan is subject to interest rate changes.

• They offer flexibility. Although the variable fixed-rate loan is pretty risky as interest rates can go up and down, borrowers can take the advantage of potential low-interest rates.

• Possibility for an offset account. Most lenders allow borrowers to have an offset account in order to save more money on interest, which comes as a huge plus in split home loans.

• Endless payments. One of the biggest advantages of having a split home loan is the option to make unlimited payments on the variable side.

• There are no restrictions. Borrowers decide how they will split their loan, and in how many pieces. Keep in mind that some lenders may allow only splitting your mortgage into two.

On the other hand, there are some drawbacks that borrowers should also consider before splitting a home loan.

• Break cost. Some lenders may charge a break cost fee on the fixed side when borrowers make repayments. Before you choose the lender, make sure you have all the necessary information regarding these fees.

• High-interest rates. The main drawback of having a split home loan is that borrowers will have to pay more if and when the interest rates go up.

• Additional fees. Most Australian lenders charge borrowers additional account-keeping costs.

Can split home loans save money?

Borrowers cannot predict interest rates oscillations in the future. Therefore, it is impossible to know whether the variable loan portion will change a few years down the line or sooner. When deciding to split their loan, borrowers accept all risks regarding the interest rate.

FRHL for the Win!

At FRHL, we aid you in choosing the most suitable loan plan for your budget and needs!

Contact our experts today to facilitate the process of choosing a home loan tailored to your financial and residential capabilities!