21 Feb 2006
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 homebuyerâ€™s fingertips.
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, youâ€™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.
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.
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 wonâ€™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 loanâ€™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.
There are many benefits Australian borrowers can enjoy by splitting their loan into two a variable and a fixed portion, as follow:
On the other hand, there are some drawbacks that borrowers should also consider before splitting a home loan.
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.
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