Have You Ever Considered Splitting Your Home Loan?

One of the most important decisions in the home loan process is deciding what type of interest rate you’re most comfortable committing to. However with fixed rates at near historical lows now and variable interest rates projected to drop even further, now could be the perfect time to split your loan between the two types of interest rates.

Variable rate homes loans are generally for people who are comfortable and willing to gamble that their interest rate may fluctuate over time. A variable interest rate gives borrowers the ability to pay off extra on their mortgage in the following ways:

  • Extra repayments
  • Offset bank accounts
  • Lump sum payments

Fixed interest rates work well for people who want security in their repayments – knowing exactly what they will be paying over a particular term without the volatility of rate movements.

One route proving very popular at the moment is for a mortgage holder to split their home loan into a both a fixed and variable portion and enjoy the benefits of both types of products while minimising the drawbacks.

Here’s an example of how splitting your home loan can work

A young couple have just purchased their first home for $450k and being first time mortgage holders they’re a little worried about how to manage their new debt although feeling comfortable in their ability to pay.

With fixed rates showing good value and being currently less than current variable rates they chose to split their loan in the following way: $400,000 Fixed for 2 years at 4.99% and $50,000 Variable at 5.50%.

The split gives them peace of mind that the bulk of their repayments will be consistent for the term of the loan, which they will only pay at the minimum level.  The variable portion of the is where they will focus on to making extra repayments and lump sums as income or bonuses allow.

The variable loan also offers the couples an offset account they can directed as much income as they like so that it saves them as much interest as they can.  Over the next 2 years the couple aim to reduce the variable loan as much as possible and even clear it and once the 2 years is complete, they will sit back down and re-assess splitting the loans again for security and flexibility.

If splitting your home loan is an option you would like to consider, contact your Loan Market mortgage broker.