Split loans offer a happy medium between the security of fixed interest and the potential lower rates of variable interest. By dividing up your mortgage, you aren’t putting all of your eggs into the one financial basket.
While we are unlikely to see negative interest rates released, they have now reached as low as 0.25% – an unprecedented decision by the Reserve Bank of Australia, to reflect these unprecedented times. Covid-19 has all but decimated entire economies on a global scale, and consumers are understandably wary of parting with their cash.
However, the Australian housing market has proven to be resilient. Housing prices have not gone entirely off the deep end just yet, and will likely be slower to react – meaning that Australians are still buying and selling homes, keeping the market relatively intact.
Why are split loans popular?
Madd Loans owner George Samios believes that split loans offer the best of both worlds in the realm of interest rates.
“There are pros and cons to fixed and variable loans, and that’s why we normally do offer a split loan option to our customers. My clients actually have both the offset account and redraw ability that comes with a variable loan, but they also have the security of a fixed loan.”
Although there are no limits with how much consumers wish to allocate to each portion of the split loan – for example 60% fixed, 40% variable, etc. What you are essentially doing is distributing interest rate movements, as well as the relevant risks that may apply or be associated with each feature.
How do split loans work?
Choosing a fixed or variable interest rate for your home loan often comes down to how familiar you are with the interest rate cycle (or not). This world can be daunting, particularly if it’s your first big foray into a large scale financial loan, which is where the option of a split loan may come in as a happy medium.
Let’s say that John borrowed $500, 000 for a home loan over a 30 year term. John fixed $300, 000 of his loan at 3.90% per annum for three years, or 60% of the total. By opting for a split loan, he kept the remaining $200, 000 (40%) on a variable interest rate at 3.59%.
His fixed monthly repayments for his home loan sit at roughly $1415, and the variable is $908, bringing his total repayments to $2323 per month.
After six months, John was notified that his lender was increasing it’s variable rate to 3.79% per annum, increasing his monthly mortgage repayments by $22 per month. If John had chosen to make his entire home loan a variable interest rate, he would have been paying an additional $57 per month.
However, if his lender had decided to decrease their variable rate to 3.40% per annum, John’s monthly repayments would have decreased by $22 per month.
The variable component of John’s loan also allows him to access features such as an offset account, redraw options, and unlimited repayments.
By opting for a split loan, John has both the security of a fixed interest rate (he knows roughly how much he is going to pay month to month without huge variances), but he also has the opportunity to be flexible as the variable interest rates tend to change. Sometimes they increase, sometimes they decrease, but he’s “in the game” while still protecting himself and minimising the risk of exposure.
Is a split loan right for me?
If you are debating the option of a split loan for your interest rate or mortgage requirements, there are some important factors to consider:
- Is your personal or financial situation likely to change in the future?
- Are you ready to fully commit to a fixed term interest rate?
- Is your main concern stability and reducing the impact (and exposure) to potential interest rate fluctuations?
- Would you prefer the option to make additional repayments, and a potential redraw facility linked to your loan?
A home or mortgage is often the biggest purchase in the lifetime of our clients, so we want to ensure that all Australians are permitted access to the option that’s the best fit for them.
If the above instigates more questions instead of answers, then perhaps it’s time that you booked in a free consultation with us at Madd Loans to weigh up your options – we pride ourselves on making mortgages fun.