When you choose a home loan that has free splits, you get the benefits that variable rate loans offer you with the security that fixed rates provide without paying extra fees.
Traditionally, you will get more options when you choose a variable rate loan over a fixed rate. You will be given choices in how and when you make your repayments and in many cases, an offset account that allows you to make additional repayments and pay off the principal faster.
What you lose with this type of rate is the security of knowing what your repayment will be each month. Unlike a fixed rate home loan, a variable rate one will fluctuate, making it difficult to properly budget your household expenses. When you have a home loan with free splits, you are able to make a portion of your loan at the fixed rate, while the rest is at the variable one. Unlike regular home loans which charge a fee, usually for each split, these types of loans offer this service free of charge.
Comparison of home loans with free splits
How does a home loan with free splits work?
Some lenders will charge a fee for the service of splitting your loan into separate interest rate types. When you have free splits, there will be no extra charges for this option either upfront or on a monthly or yearly basis. Some lenders can also charge borrowers an annual fee for each portion of the home loan which is split, so these types of loans can avoid these extra charges.
Most people will use this type of loan to get the benefits that variable rates offer and the opportunity to save in interest if rates fall. The fixed rate portion gives them the security of a consistent repayment amount with no worries about rising interest rates. With no fees associated with this type of loan product, you have even more chances to save money with your home loan.
Case study: Home loan with free splits
Dane and Jennifer are a couple who is borrowing $550,000 to purchase a first home, and want to take advantage of a home loan with free splits in order to enjoy low rates, and also add a bit of security to their loan with a fixed rate portion. With no added fees to worry about, they can easily get an estimate of how much their repayments will be with a home loan calculator. They split their home loan 50/50. The fixed period is for three years and has a slightly lower rate than the variable portion.
|Loan amount||$550,000||Loan term||30 years|
|Fixed period||5% p.a.|
|Fixed rate||3 years|
|Fixed monthly repayments||$1,476.26||Total interest payable||$569,133|
|Variable monthly repayments||$1,561.42||Total interest payable if loan was at variable only||$574,222|
|Total monthly repayments||Saving of (by splitting)||$5,089|
|Before 3 years||$3,037.68|
|After 3 years||$3,116.59|
What to look for in these types of home loans
- Flexibility. When looking into a split loan option that has no fees, you will want to look at the different ways it is being offered. Some lenders will allow you to choose a 50-50 split, 60-40 or 70-30. Also keep in mind that most lenders will limit the amount of splits you can carry out.
- Offset account. One of the biggest benefits to many variable rate home loans is the 100% offset account. This feature works just like a transaction account, except that the amount invested is deducted from the principal when calculating your interest payment for the month. You will want to be sure that by choosing a home loan with free splits, you are not losing the 100% offset account benefit.
- Repayments. Check that you are able to make as many extra repayments as you want. With some fixed rate home loan products you will be limited to the amount of extra repayments allowed, and exceeding that limit could subject you to penalty charges.
- Fees. While some lenders will charge for the extra paperwork involved in establishing this type of home loan you can find some that are free of monthly and annual fees. Research this option carefully to get the most benefit from splitting your home loan.
Positives and negatives
- Offset account. In most cases you will find that a 100% offset account will be made available to your as part of the variable rate portion of your loan.
- Flexible repayments. You will still have the option of making interest-only repayments for at least a portion of your loan terms.
- Fees. When you choose a home loan with free splits, you can avoid having to pay extra charges for the extra accounts.
- Free splits. Most lenders usually charge a fee for splitting your loan, but as mentioned the loans on this page are ones which offer free splits.
- Fixed rate. You could potentially miss out with the fixed rate portion of your home loan if the interest rates fall.
- Variable rate. If interest rates start to rise, the repayment amount for your variable rate portion of the loan will also go up.
Things to avoid about home loans with free splits
- High rates. Check over the paperwork carefully and compare the interest rates being offered to you from home loans from other lenders. You will want to make sure that in lieu of monthly and annual fees, you are not being charged an interest rate that is higher than with other lenders.
- Over splitting. In many cases you can split your loan into more than two accounts. This can make your home loan more confusing than it needs to be. Avoid adding extra pressure on yourself by keeping the home loan with free splits to two accounts only unless you have a sound knowledge of how these splits will affect your home loan.
Frequently asked questions
How long will the fixed rate period last?
Just like with a regular fixed rate home loan, the fixed rate terms offered with a free split home loan will be allowed for short terms usually between one and five years. Some lenders can offer these terms for seven, ten and even up to fifteen years.
At what ratio may I split the loan?
Depending on the lender, you should have options to how you want the loan to be split. To get a better idea of your repayment amounts and at which proportions you should split the loan, you could use a home loan calculator and input the different ratios you are being offered.