If you can't decide between a fixed or variable rate, a split rate home loan could provide the best of both worlds.
If you’re about to take out a home loan and are looking for some protection against interest rate rises, a fixed rate home loan may sound like the loan for you.
On the other hand, if you don’t want to miss out on the benefits of a potential interest rate cut, and/or you’re looking for additional flexibility, a variable rate home loan could also have its advantages.
If you’re tossing up between the two, but can’t decide, the good news is you also have the option of a split rate, where you can fix part of your home loan, while leaving the rest variable.
If you’re keen to know more, we explain how a split home loan works, and look at some of the pros and cons worth taking into consideration.
What is a split rate home loan?
A split rate home loan effectively allows you to split your home loan into different loan accounts that charge different interest rates—with people typically opting for part fixed and part variable.
Before we explain further, here’s a quick refresh of how fixed rate and variable rate home loans differ.
What’s a fixed rate home loan?
A fixed rate home loan allows you to fix your interest rate for a specified period (typically one to five years), after which time the loan will generally switch back to your lender’s standard variable rate.
Any interest rate rises that happen within that timeframe won’t affect you, so you’ll know exactly what you have to pay each month, as your repayments will stay the same.
This could make budgeting easier, but the downside is you won't benefit from a potential drop in interest rates if your fixed rate is more than the variable rate your lender is charging.
On top of that, there are often restrictions around making extra repayments when opting for a fixed rate home loan, and redraw and offset facilities mightn’t be available.
Meanwhile, if you want to change lenders, or pay off your loan within the fixed period, you might also have to pay break fees.
What’s a variable rate home loan?
A variable rate home loan doesn’t protect you from interest rate rises, which means your repayments could go up or down depending on whether your lender adjusts its rates, which could make it harder to budget for the future.
On the upside, variable rate loans often provide extra flexibility, so generally there aren’t restrictions or penalties for making additional repayments, so you could pay off your home loan sooner.
You’ll typically have access to more features too, such as an offset account which could reduce what you pay in interest, or unlimited redraws on any additional repayments you make.
It also may be easier to switch loans if you find a better deal as you’re not locked in the same ways as you are when you have a fixed rate home loan.
How do the two come together?
When it comes to a split rate, you can split your home loan into two accounts, fixing the interest rate on one portion while leaving the other portion variable to potentially get the best of both worlds.
For example, if you have a $600,000 loan, you could opt for $400,000 to be fixed and $200,000 to be variable, allowing you to manage the risk of interest rate movements with the fixed portion, while taking advantage of possible interest rate cuts on the variable portion.
In the meantime, you’ll have the ability to make some extra repayments when it comes to the variable portion, however this won’t be applicable to the fixed portion where penalties will generally still apply.
Depending on your lender, you might also still have access to some redraw and offset features.
Before you make a decision, you should consider your situation and the potential advantages and disadvantages that different types of loans may offer and where features, flexibility and fees could make a big difference.
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