With interest rates at an all time low, the question of whether to choose a fixed interest rate loan is a hot topic. Last month we took a closer look at The Pros and Cons of a Fixed Rate Home Loan, but what if you are torn between a fixed rate and a variable rate home loan? There is a solution – you can take out a split rate mortgage.
What is a split mortgage?
A split mortgage is a loan feature that enables you to split your home loan into multiple accounts that attract different interest rates. You can allocate as much as you want to each account as long as it is allowed by your lender. A split mortgage has two components: fixed rate and variable rate.
You can read about fixed rates in last month’s blog, meanwhile, the variable component of a split mortgage will be set to the bank standard variable rate (BSVR). The interest rate that will be charged to you varies according to the RBA cash rate. With a variable rate, you can make extra repayments to help pay off your loan faster and it may also be easier to switch loans if you find a better deal as you are not locked in like with a fixed home loan. The downside is, as the rate is variable, when interest rates rise, your repayments might too.
What are the advantages of a split rate mortgage?
By splitting your home loan, you can enjoy the benefits of both fixed and variable rates while reducing the risks on each option. A split mortgage offers the following benefits:
- The fixed component of the loan lets you manage the risk of interest rate fluctuations, protecting you from a sudden interest rate rise.
- The variable component of the loan allows you to take advantage of a potential interest rate fall.
- You can enjoy a competitive interest rate which can be secured with the fixed rate while retaining the flexibility of the variable component.
- You can make unlimited extra repayments on the variable component of the loan, allowing you to reduce the size of your loan much quicker.
- The fixed component of the loan can help you save more when interest rates rise.
- You can choose the length of time your loan is split into fixed and variable rates. However, this ability will depend on your lender and loan package.
- You can split your loan by any amount you want. For instance, you can opt for 80:20, 60:40 or 50:50 – whichever may be the most suitable for you. Some lenders will even allow you to split your loan up to four times, giving you plenty of room to customise your rate structure to suit your needs.
What are the disadvantages of a split rate mortgage?
Despite having many benefits, a split mortgage can also be risky. Here are its potential downsides:
- You might miss out on the potential interest rate fall on the fixed component of the loan.
- Since a portion of the loan is variable, you might pay more if interest rates rise.
- The fixed component of the loan may attract break fees if you wish to pay it out.
- You might attract added establishment and ongoing fees that may be charged on both the fixed and variable components of your loan. Some lenders will charge you each time you split your loan.
A split rate home loan is a great option if you are looking for both security and flexibility in a loan but keep in mind that it is not a separate loan in itself – it is only a feature that is included in a loan package. A split loan option might be a great way to avoid some of the pitfalls of the mortgage and property market. It can also be a very savvy way to get the most out of your mortgage, especially when interest rate cuts are likely to happen.
To be able to enjoy this feature, contact a member of the Seek Financial team to see if this can be included in your loan package. Of course, If you need help deciding whether to choose a split mortgage or what options are best for your current and future needs, please reach out, we’re always here to help.
The above information is general in nature. It has been prepared without taking into account your objectives, financial situation or needs.