If two words could describe a split loan they would be security and flexibility. Get the best of both worlds with a split rate home loan.
If you have been agonising over the decision between a fixed rate or variable rate home loan, your choice can be made easier by choosing a split loan.
A split loan allows you to allocate a portion of your loan amount to attract a variable interest rate, and another portion to attract a fixed rate. You are able to take advantage of the security of a fixed rate but with the flexibility of a variable rate, as well as reduce the impact on your loan repayments if interest rates rise.
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Split home loan comparison
Rates last updated October 21st, 2016.
- NAB Choice Package Home Loan - 2 Year Fixed (Owner Occupier)
Interest rate now 3.75%
July 12th, 2016
- IMB Budget Home Loan - LVR < 90% (Owner Occupier)
Comparative rate decreases by 0.09% | Interest rate decreases by 0.09%
August 12th, 2016
- NAB Choice Package Variable Rate - $250k to $749,999 P&I (Owner Occupier)
Interest rate decreased by 0.10%
August 19th, 2016
What is a split rate home loan?
This is the process of splitting portions of your principal into different home loan accounts that attract a different type of interest rate. You can choose much you would like to allocate to each account, limited to the amount of accounts your lender allows. Assuming that you'd like allocate a portion to a fixed rate and another portion to a variable rate, you'll get to benefit from both security and flexibility.
There's generally no limit to the way you want to split it, so you can allocate the funds 50/50 or 20/80, the decision is up to you. Split rate home loans allow you to hedge your bets against negative interest rate fluctuations in times of economic uncertainty but also pose a risk if rates drop but your fixed portion stays at a relatively high rate.
At this stage you may want to speak to your financial planner about current and future economic conditions to see how you can best split your loan.Back to top
How do I use a split loan?
- A split facility is a feature, not a type of loan. You'll need to ensure that your loan has a split facility first, as it is a feature, not a type of loan. Check with your lender if it can be included in a loan package which you may choose to add to your home loan when you apply.
- You get to decide how much and which rate. You can usually choose to allocate any amount of your loan to both a variable and fixed interest rate. Popular splits are 60% variable and 40% fixed, or a split down the middle or 50/50 to distribute interest-rate movements and risks.
- Direction of interest rates. When you choose a home loan it is best to think about where you will be in 5 to 10 years so you can choose a loan with the features an interest rates which will suit your needs now and then. It is also important to consider where interest rates are on their cycle before you choose a fixed or variable interest rate loan. However if you're not sure what rates are doing and you're not sure where you will be in the future, a split loan gives you the best of both worlds and the effects are effectively halved for each split. While official interest rates may rise only a portion of your split loan will be affected and the effects are lessened.
Catherine goes for a split loan
Catherine is discussing her split loan options with XYZ Bank. XYZ advises that she can borrow some of the money on fixed interest rate and some on a variable.
She needs to borrow $300,000 and wants both repayment certainty but the ability make additional repayments, and put funds into an 100% offset account.
One option she considers is to take $150,000 at a fixed rate and $100,000 at a variable rate. She puts the $100,000 in XYZ Standard Variable Loan and the $150,000 in XYZ 3 Year fixed loan. The $50,000 that is left, she leaves in the XYZ Offset account.
When Catherine starts paying off her loan, she will know the exact amount she needs to pay into her fixed rate loan and also pay as much as she wants into the variable portion, though she is required to meet minimum repayments.
How do I find the best split loan for my situation?
Since the split loan is simply a feature which you can add to many existing home loan offers, you need to know what you are looking for in a split loan package deal and what makes for a good deal and whether you need to split.
Decide whether the other features of the package will benefit you
As a split loan is usually part of a professional package offer on top of a standard home loan, consider whether the other benefits and features included in the package are worth the additional costs to add this package to your loan
Look for a low or no setup fees
Some lenders will charge you each time you speak your loan between fixed and variable rate, however it is possible to find a split loan with affordable fees, or a fee free split option.
Make sure there are no penalties for additional repayments
Although you have a portion of your home loan as variable, some of it still behaves independently as a fixed portion and as such you may be charged when you make additional repayments towards your loan. Therefore find out whether you are able to make repayments to just the variable portion of your loan or whether you can avoid additional repayment fees altogether.
You can choose the length of the split term
As with other fixed interest rate terms on home loans you can choose the length of time your loan is split into a fixed and variable rate to split term is available to you will depend on your lender and on package you have added to your loan.
Customise your split so it suits you
Some institutions let you split your loan up to four times, so there's plenty of room to customise your rate structure to suit your needs. Although most borrowers go for the 50% fixed and the 50% variable rate path - it's not gospel. If you want to create different scenarios and find out which way a split loan best suits your needs, you can start by using a split loan calculator. This loan calculator lets you calculate repayments with fixed and variable rates, and create different possibilities that will give you a detailed picture of how to best structure your loan.Back to top
So how does a split loan calculator work? It basically takes the information you enter to work out the total interest charged over the life of a variable loan, and then compares this information to a fixed rate loan with the same information.
When you start using the split loan calculator, don't forget to pay extra attention to the information you're adding. Each number you enter correlates with the final outcome. So if you still don't have the exact numbers, find them out. If you can't do that, use the closest figures available.
What fields do I need to enter?
Be sure to type in the right information for the following: loan amount, interest rate, repayments, repayment frequency, length of month, number of weeks and fortnights in a year. Take a look at each phrase below to understand what makes up a split loan calculator.
- Loan amount: This refers to the amount you've borrowed, or plan to borrow from a lender. Make sure you type in the approximate amount you want to borrow. The more exact the better.
- Interest rate and length of month: This is the fee a lender charges a borrower for the use of their money. Interest is calculated daily on the outstanding amount of the loan. The interest depends on the number of days a month has. Although most months have the same number of days, some don't.
- Repayments: These are the payments you make towards your loan to pay if off.
- Repayment frequency: This refers to how often you'll pay your loan off. You can choose weekly, fortnightly or monthly instalments depending on your pay structure and personal preference. One year supposedly has 52 weeks and 26 fortnights. Therefore a year has 364 days rather than the normal 365 or 366.
- Rounding of amount of each repayment: The calculator uses the unrounded repayment to calculate the amount of interest payable.
- Amount of each repayment after expiry of fixed rate period: The amount of the repayments you'll make depends on the original loan term.
Once you've reviewed the split loan calculator terms and you've pictured your perfect loan scenario you can start using the calculating device. The first important step begins by typing in the loan amount. Say you type in $260,000 paying monthly. Automatically the calculator will draw the fixed repayment, which in this case would be $1,100, the variable repayment $761, the total monthly repayment $1,861 and the total interest payable $432,750.
When you're done calculating the split, you should have a good idea of how a split loan can help you. And if you have any questions don't hesitate to ask an expert.Back to top
Frequently asked questions about split home loans
Who do split loans suit?
Split rate home loans suit those who want some of the features and security which comes with a combination of variable and a fixed rate home loans. This means the flexibility of a variable rate home loan, with the security of a fixed rate home loan, which can see borrowers lower their risk when it comes to rising interest rates. Always seek the advice of an expert mortgage broker or financial planner before you consider whether or not a split rate home loan will suit you.
Can my split home loan affect negative or positive gearing?
Depending on how it's setup and how interest rate fluctuations are going, it may put your investment property into positive or negative gearing.
How much do I split?
Again, the answer to this depends on your personal circumstances. How much you split, and what interest rate types you decide to split into will be affected by the loan size, what you think will happen to interest rates in the future, and more. Do some research and ask yourself: would you be happy if rates rose by 1%? how much could you save if rates fell by 1%? As mentioned above, a financial planner can help you decide whether or not you should split your interest rates.
What is the benefit of a fixed rate portion in a split rate home loan?
A fixed rate locks in a rate for an agreed period of time. During this fixed term, your rate, and therefore your repayments, won't change at all. This can give borrowers who are trying to keep to a strict budget more security, and can shield them from increases in rates.
What is the benefit of a variable rate portion in a split rate home loan?
If you have a variable rate home loan you might have interest rates dropped if your lender decides to do so. This can see you make savings as your repayments will decrease in line with the rate decrease. A split rate loan with some portion at a variable rate can also utilise features such as offset accounts, which are not always available on fixed rate home loans.
Can my home loan application be decline because of a small default?
This usually depends on the lender's policy and how lenient they are regarding missed payments, some banks may decline a loan application due to a small default. A good step is to repay the amount and to try repair the relationship with the biller.
Is it possible to have a guarantor for my split loan?
Yes, a guarantor is another feature that you can add to your loan with a split loan facility. Speak to your lender today.
Can a split loan facility help me pay off my mortgage in the fastest way?
If used effectively, a split loan facility can help you pay off your loan quicker. Staying on top of economic conditions and using your offset account effectively can help.
Are split loan facilities available on investment loans?
Yes, they are offered on investment home loans too.