If you’re weighing up whether a fixed or variable interest rate is right for you, split loans can offer a way for consumers to access the perks of both options.
In March 2021, the Commonwealth Bank of Australia announced its lowest ever fixed rate for home loans on two year fixed periods, dropping to 1.9% per annum. The real surprise though was the announcement in relation to the bank’s four-year fixed term. For owner occupiers, the four year fixed interest rate rose from 1.99% to 2.19%, making them the first of the big four banks to hike the four year rate since October 2019.
With talk of interest rates in Australia often dominating the headlines, it can be difficult to keep up with the latest updates – will they rise any time soon, stay stable, or are they expected to fall? As a result, it’s easy to understand why many Australians are more confused than ever when it comes to fixing the interest rate on their home loan, or taking the punt by going with a variable one – but what if you didn’t have to choose?
A Crash Course On How Split Loans Work
In a nutshell, split loans are a home loan or mortgage product that is ‘split’ into multiple loans with different interest rates. One of the most common examples used in today’s market is a home loan that has a variable interest rate component, with the remaining amount linked to a fixed interest rate.
The fixed rate may allow borrowers to effectively manage the risk of interest rate fluctuations, while still taking advantage of potential rate cuts with the variable portion of their split home loan. While the exact amount you can split up varies between lending providers, generally there’s quite a bit of flexibility as to how much you allocate where i.e. 20% variable, 80% fixed.
As an example of how split loans work, let’s review Lisa’s home loan, who borrowed $500,000 for a loan over a thirty year term. Lisa opted to fix $300,000 of her mortgage at 1.98% per annum for three years, or 60% of the total amount. She then made the choice to allocate the rest of her home loan of $200,000 (40%) on a variable interest rate at 2.72%. Based on this arrangement, Lisa’s fixed repayments sit at around $1,137 per month, and the variable component at $813 per month, bringing her total repayments to $1,950 per month.
However, six months later, Lisa was notified that her lending provider was increasing their variable rate to 2.92% per annum, which in turn increased her mortgage repayments by $22 per month. If Lisa had opted to stake her entire home loan at a variable interest rate, she would have been paying an additional $137 per month. In comparison, if Lisa’s lending provider had instead decided to decrease their variable rate to 2.52% per annum, her repayments would have decreased by $21 per month.
By opting for a split loan, Lisa is somewhat protected with the fixed component of her mortgage, but is still open to the potential ups and downs that variable interest rates have to offer with less risk. The variable component of Lisa’s home loan also allows her to access features such as an offset account, redraw options, and unlimited repayments.
Most lenders offer borrowers the ability to split their loan – but not necessarily on all of their products. As such, it’s always worth checking whether the particular loan product that you are considering can be used as part of a split arrangement. If you’re not sure, this is the time to enlist the services of a reputable mortgage broker to help you navigate your options.
Getting The Right Advice The First Time
With a background in banking, finance, business development and project management, there’s no better advocate to have on your team than Nikki Berzin. As a fully qualified mortgage broker and director of Cherry Lending & Finance, Nikki is passionate about all things finance, and empowering her clients with the tools to hit their property goals is what she does best.
If you’re looking to get into your first home, purchase an investment property or even want to look at your options for refinancing, the first step is starting the conversation. Get in touch with Nikki today, or call her directly on 0427 374 155 to bring your mortgage dreams to life.
Disclaimer: Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product. Subject to lenders terms and conditions, fees and charges and eligibility apply.
Credit Representative 499652 is authorised under Australian Credit License 389328.
This page provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.
This testimonial was given by our customers. They are individual experiences of our customers that have used our service. However, they are individual results and results and outcomes may vary. We do not claim they are typical results that consumers will generally achieve. Cherry Lending & Finance cannot and does not guarantee results. Your full financial situation would need to be reviewed prior to acceptance of any offer or product.