With the Reserve Bank of Australia indicating its reluctance to move rates up any time soon, both variable and fixed home loan rates could well continue to stay low for the foreseeable. Fixed rates in particular have grabbed the headlines, with some experts predicting that the current record lows could be as good as it gets for homeowners.
“While there have been a number of false bottoms on fixed rates over the last decade or more, I reckon we are now there. As such, there is a very strong case for home buyers to lock in a portion of their loan at a fixed rate,” AMP Capital chief economist Shane Oliver told the Australian Financial Review, adding that “…the next move in fixed rates is likely to be up”.
Canstar finance expert Steve Mickenbecker also believes homeowners should give some serious consideration to fixing now.
“Now is a great time to do a deal with your bank, given the possibility of some of today’s super-low rates edging up when the Reserve Bank’s low-rate term funding facility comes to an end around mid-year,” he said recently.
Of course, doing a deal with your bank doesn’t necessarily mean you need to fix 100% of your loan. If you’re keen to fix a portion of your loan, but don’t want to miss out on some of the appealing features of a variable home loan, a split home loan is a commonly-used compromise.
This article explains:
What is a split home loan?
A split home loan allows borrowers to split their home loan into two separate loans: one with a fixed rate and the other variable. It can be an option to consider for borrowers who want a level of certainty for their repayments and budget – via the fixed portion – and some of the flexibility typically offered by a variable loan.
Most lenders offer borrowers the ability to split their loan, but not necessarily on all of their products, so it can be worth checking whether a particular loan you are considering can be used as part of a split arrangement.
How do split home loans work?
Split home loans generally work similarly to solely fixed or variable loans when it comes to how they are assessed by the lender and, if approved, the day-to-day running of the loan.
However, when you make your application you would need to outline:
- that you would like to split your loan
- which eligible fixed and variable products you wish to base the split on
- how much of the loan you want to fix and how much to make variable
Some lenders allow the borrower to decide how much to fix, but consider checking whether your lender applies a minimum dollar or percentage level for how the loan is divided.
As a hypothetical, a borrower might choose to split their loan so that 60% is fixed and 40% is variable. If the balance of the loan is $500,000, in this example the borrower would be charged a fixed rate of interest on $300,000 and a variable rate on the remaining $200,000 of the balance.
You can use Canstar’s split loan calculator to work out what your repayments would be based on different interest rates and split levels.
The borrower typically makes separate regular repayments on each of the loans, but may be able to arrange for these repayments to be made on the same day to help make budgeting more manageable.
If your loan is split, you usually have access to some or all of the features of each of the loan types, such as the ability to make additional repayments on the variable portion.
At the end of the fixed term, the fixed portion of the loan is closed and the entire remaining balance will revert to a variable rate, unless you lock in a new split loan or other arrangement with your lender. Depending on the conditions of the loan, the revert rate could be the rate that applies to the variable portion of the split loan or a different, potentially higher, variable rate. Consider checking your lender’s policy for what happens at the end of the fixed term.
What’s the difference between split, fixed and variable home loans?
The main differences between split, fixed and variable loans are how interest is charged and the features you have access to.
With a fixed rate loan, the interest rate and regular repayments are set at the start of your loan agreement and won’t change until the fixed term ends or you choose to end it prematurely (the lender usually charges a fee if you do this). Fixed loans typically come with fewer features than variable loans, and there are usually restrictions on making extra repayments.
With a variable rate loan, the interest rate can change at any time, meaning your regular repayments could go up or down. You may have access to additional features that some fixed loans don’t offer, such as the ability to make extra repayments without penalty, use a redraw facility to withdraw extra repayments, or use an offset account to reduce the amount of interest you’re charged.
A split loan offers a combination of fixed and variable. It means your repayments on the fixed portion will not change, but could on the variable part. However, if rates do go up, you will be less exposed to the increase, as only part of your loan is variable. On the other hand, if rates go down, you will only get part of the benefit. This brings us on nicely to the pros and cons of this kind of loan set up.
What are the pros and cons of a split home loan?
Some of the pros of a split loan include the flexibility it can offer and allowing borrowers to ‘sit on the fence’ as to whether they think interest rates are likely to change in the future. The cons can include a more complicated application process and potentially higher fees. Let’s look at the pros and cons in more detail.
Potential pros of a split home loan
With a split loan, you can generally decide what portion of the loan to fix and how much to have at a variable rate, so it can be set up to suit your preferences and financial needs.
Because part of the loan is at a fixed rate, you can be confident that even if interest rates change, the repayments on that portion of the loan will stay the same. While this may be advantageous if interest rates go up, it will also mean you don’t benefit with this part of the loan if interest rates drop. However, it could help you to balance your overall risk.
On the variable portion of the loan, you may have access to features that help you save on interest, such as an offset account. Be sure to check which features are available on your loan and if there are any restrictions or limits that apply to using those features on a split loan.
Potential cons of a split home loan
Not all home loans can be split, so you will generally have a smaller selection of products to compare if you go with this option.
Complexity and cost
A split loan essentially means having two separate loans – one variable and one fixed – meaning there is more to consider when choosing the products and making your application. Depending on the lender and products you choose, you may also end up paying fees on two loans instead of just one. If you chose to switch loan or provider during the fixed term of your split loan, you could face break fees
Potential for budgeting uncertainty
Compared to fixing your entire loan, a split loan means that on the variable portion you could still see an increase in your repayments if interest rates rise.
How do you decide on the split amount?
Some of the factors you may want to consider when deciding what percentage of your split loan to fix and how much to have at variable rate include the interest rates available, your budgetary needs and how much interest you may be able to offset via the variable portion of the loan.
Interest rates: If the fixed rate is lower than the variable rate, you may decide to dedicate more of the loan balance to the fixed rate to save on interest, or vice versa.
Your budgetary needs: If a greater level of budgetary certainty is appealing, you might decide to fix more of the loan to reduce the impact of possible rate increases. Of course, if rates go down, you might wish you had a higher proportion at a variable rate.
Offsetting interest: If the variable portion of your loan comes with an offset account, you may want to consider how much money you will have in this account when deciding how much of your loan to have at the variable rate.
How to compare split home loans
When comparing split loan options, it could be worth considering the same factors that you would with either a fixed or variable loan, plus some other split-loan-specific ones.
Interest rate: Shopping around for competitive rates on each of the loan components could be a good place to start. The potential added flexibility of a split loan may not be worth it if the rates you’re paying are not competitive, including the loan revert rate when the fixed term ends.
Fees: With a split loan, because you could be facing multiple fees, it can be particularly important to shop around to keep fees down.
Features: Ensuring your loan comes with features such as a redraw facility and/or an offset account could help you reduce interest costs.
Split options: Are the lender’s most competitive loans available for splitting or is the selection limited? Can you select the portion to fix based on your needs? And can you change this down the track if your situation changes?
You can compare home loans that allow for a split with Canstar. In the comparison tables, filter by ‘Split loan option’ under ‘Features’.
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