Considering the constant rise in property prices in Australia and the low official cash rate set by the Reserve Bank of Australia (RBA), a split mortgage sounds like a safe bet.
Home buyers are faced with one of the biggest decisions that they’ll need to make – should you fix your interest rate or should you go variable?
Fortunately, for those who’re having a tough time to decide between locking in their rate and going variable, some lenders provide you with a much easier option, a split mortgage.
What is a split mortgage?
A split mortgage, or a split rate home loan, is a loan feature that allows you to split your home loan into multiple loan accounts that attract different interest rates. A popular example for this is to split the home loan to attract a variable interest rate and another to a fixed rate.
This also allows you to effectively manage the risk of interest rate fluctuations with the fixed portion of the loan, while taking advantage of depreciating rates with the variable portion. You can allocate as much as you want to each account as long as it’s allowed by the lender.
It’s recommended that you seek professional advice from your accountant or a professional financial advisor about your current situation to figure out what suits your need.
Is it suitable for me?
A split mortgage is generally suitable for those that look for security and flexibility in a loan.
Since a split home loan is a combination of a fixed rate home loan and a variable rate home loan, you can find both of their features in one loan. This means you can enjoy the flexibility of the variable rate portion, with the security that comes with the fixed rate portion.
The fixed rate portion can help borrowers lower the risks of rising interest rates. On the other hand, the variable portion allows them to take advantage of further drops in interest rate.
Need help applying for a split home loan?
Call us on 1300 889 743 or fill in our free online assessment form to speak with one of our brokers and find out if a split home loan is suitable for you.
How do I apply for a split mortgage?
Before you choose a home loan, it’s always a good idea to think about where you’ll be in the next 5 years. This will help you choose a loan with suitable features and interest rates.
Choosing a fixed rate or variable interest rate home loan comes down to how well you understand the interest rate cycle. If you’re not sure about how the interest rate cycle is doing then a split loan may be a suitable solution for you.
This allows you to get the best of both components and the effects of each feature is halved. This means that although the interest rates rise in the future, only a portion of your loan will be affected.
A split mortgage is a feature that is included in a loan package when you apply for a home loan. Keep in mind that it isn’t a separate loan by itself.
Speak with your lender or credit provider if this feature can be included in a loan package which you can add when you apply for a home loan.
How much can I split?
There is no concrete rule to how much you can split, which means that you can split your mortgage by any amount you want.
For instance, you can split the loan down the middle or 50/50, or you can split it 20% variable and 80% fixed.
Keep in mind that splitting a mortgage means you distribute interest rate movements, as well as the risks involved with each feature. It’s essential that you seek advice from a professional financial planner before you decide to choose a split mortgage.
What does the fixed portion offer?
A fixed rate allows you to lock in your home loan for a certain period of time, usually one year, three years and 5 years. During the fixed period, the interest rate on the loan will remain the same in spite of any changes made to the official cash rate by the RBA.
For example, if you fix a $300,000 loan for 3 years, the interest rate on your loan will not be affected by any interest rate fluctuation over the next three years.
When the fixed term ends, the interest rate reverts back to a variable rate.
What does the variable portion offer?
The variable portion of the split mortgage will be set to the bank standard variable rate (BSVR), that is, the interest rate set by the bank. The interest rate that you’ll be charged varies according to the RBA cash rate.
For example, if you take out a 30 year loan worth $300,000 with a variable rate of 4.50%, your monthly repayments would be around $1,520. However, a 2% rise in the interest rate in the next five years means your monthly repayments would increase by more than $300 a month to $1,847.
However, variable rates can be quite flexible, especially because you can make unlimited extra repayments. You can also get an offset account that will allow you to offset part of your monthly interest.
In some cases, you can even save on interest if the rates drop further in the next few years.
What do I need to look out for?
A split mortgage sounds like the safest bet, considering the pros and cons of fixed and variable rate home loans. However, there are a few things that you need to look out for before you decide to split.
Understanding the advantages and disadvantages of the split mortgage can help you find out if splitting is suitable for your situation.
What are the benefits of a split rate home loan?
By splitting your home loan into two, one fixed and the other variable, you can enjoy the benefits of both sides while lessening the risk and effect on each option. In particular, a split mortgage offers:
- Security: The fixed rate portion of the loan allows you to manage the risk of interest rate fluctuations. This protects you against sudden rises in interest rate.
- Flexibility: The variable component is the more risky side since there is the risk of an interest rate rise. However, the flexibility of this portion allows you to take advantage of potential decrease in interest rates.
- Competitive rates: You can get a competitive interest rate which can be secured with the fixed rate, while retaining the flexibility on the variable side.
- Unlimited repayments: You can make unlimited extra repayments on the variable side of the loan, which means you can reduce the size of the loan much quickly.
- Offset: Some lenders provide you with the option to have an offset account. This can help you save a lot of money on interest.
What are the drawbacks?
Aside from the benefits of a split mortgage, there are some things that you need to consider before you apply, which can include:
- Missing out on potential interest rate drops on the fixed component of the loan.
- Paying more on the variable component if the interest rates rise.
- Additional fees, such as account-keeping costs may be charged on both the fixed and variable sides.
It’s essential that you do your research and speak with a financial advisor before you make your decision.
Split mortgage FAQs
Can I get a guarantor to secure the split loan?
Yes, a guarantor to assist you to buy a home. Generally, with the help of a guarantor, lenders allow you to borrow 100% loan to value ratio (LVR), even 105% to cover additional costs such as government stamp duty.
Most lenders even waive the requirement for Lenders Mortgage Insurance (LMI) if you have a guarantor.
Our mortgage brokers are guarantor home loan experts. They can help you find a suitable lender that can meet your home loan and financial needs from our panel of almost 40 lenders.
Call us on 1300 889 743 or complete our free online assessment form to find out if you qualify.
Will I be able to pay off my loan faster?
Provided that the interest rate doesn’t rise and you can use the split mortgage effectively, you may be able to pay off your mortgage early.
Also, using your offset account more effectively and making regular additional repayments can also help you stay on top of the mortgage.
Can I get a split loan feature on an investment loan?
Yes, split loans are available on loans for investment purposes.