A split home loan offers several advantages that can help you optimize your financial situation. By dividing your loan into different portions, you can take advantage of variable and fixed interest rates and associated benefits.
What is a Split Home Loan?
A split home loan is a mortgage option that combines elements of both fixed and variable-rate loans. With a split loan, you can divide your mortgage into multiple accounts, typically two, with each account having a different interest rate structure.
For example, let’s consider a scenario where you have a $500,000 home loan and decide to split it 50:50. In this case; one account would have a fixed interest rate applied to $250,000. In contrast, the other account would have a variable interest rate applied to the remaining $250,000. Alternatively, if you split your home loan 60:40, one account would have a fixed rate of $300,000, and the other would have a variable rate of $200,000.
Should the Loan be Split Equally?
When considering a split loan, the split doesn’t need to be equal, such as a 50/50 split. While that is a common practice in many banks, you have the flexibility to determine the split ratio that suits your needs. Consulting a mortgage broker can provide valuable guidance in deciding the appropriate split ratio, ranging from 60/40 to 80/20 or even varying across multiple splits.
Some lenders may allow you to split your loan multiple times, typically up to six splits. To make an informed decision, it’s essential to inquire about the specific split loan offers available from lenders.
Benefits of Split Home Loans
You can benefit from fixed and variable rate features by splitting your home loan. Here are some advantages:
Stability and Budgeting
The fixed-rate portion of the loan provides stability as the interest rate and repayment amount remain constant for the specified fixed period, usually one to five years. This allows for better budgeting and planning, as you know exactly what your repayments will be during this period.
Flexibility and Additional Repayments
The variable rate portion of the loan offers flexibility, allowing you to make extra repayments without incurring penalties. This helps reduce your loan balance faster and can save you on interest payments over time.
Offset Sub-Account
Split loans often include an offset sub-account linked to the variable rate portion. An offset account allows you to deposit your savings, and the balance is subtracted from the principal amount on which interest is calculated. This reduces the interest payable on the loan and can help you save money.
Hedging Against Interest Rate Fluctuations
By splitting your loan, you can minimize the risk of interest rate fluctuations. If interest rates rise, the fixed rate portion remains unaffected, providing stability. Conversely, if interest rates fall, the variable rate portion allows you to exploit potential rate decreases.
Deciding whether to split your loan depends on your circumstances and risk tolerance. A split loan can be beneficial, especially for those concerned about the current interest rate cycle. If you lack confidence in the economic conditions and anticipate future rate hikes, a split loan offers protection against increases that a variable rate loan does not provide.
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