Split the risk by splitting your home loan into two parts: part fixed and part variable.
A split loan allows you to borrow part of your mortgage on a fixed interest rate and the remainder on a variable interest rate – all under the one loan product.
This tactic can provide a wealth of advantages: borrowers have the flexibility of variable terms and the repayment security of a locked-in rate. They can also retain loan features important to them, such as making additional repayments, redraw facility or linked offset account.
How much to split
Common split loan ratios are 50:50, 70:30 or 60:40 over a two-way fixed and variable rate. Of course, you have the freedom to choose how much money you assign to each loan type. It comes down to the amount of risk you want to take on the cash rate going up or down.
Interest rate changes
We've learned in recent times that banks don't always pass on a rate cut when the Reserve Bank of Australia slashes official interest rates. However, they always seem to pass it on in full when there's a rate increase. This is why borrowers can enjoy the combination of competitive interest rates over a split loan. There's confidence in set repayments and a sense of protection, which minimises the impact of rate hikes.
Who are split loans good for?
Split loans are great for borrowers wishing to spread their interest rate risk, particularly in the event of an interest rate rise. They can better manage their loan by taking advantage of both loan products. The fixed rate loan assists with budgeting, since you know the exact amount you need to pay, whereas the variable loan lets you pay as much as you like, provided that you meet the minimum repayment amount.
Split loans are also ideal for property investors. Many keep their owner-occupier loan on a fixed rate, while the investment property loan is kept to variable terms in a bid to make the most out of tax deductions on increasing interest.
Choosing a split loan
Today, it's extremely popular for financial institutions (the Big Four, HSBC, Citibank, mortgage brokers) to offer split loan products. Some of them even enable borrowers to link one of their eligible loan portions to a 100 per cent mortgage offset account.
It's easy to find out whether a split loan could be the answer for you. Compare split rate home loans now at Moneyhound.
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