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, a split loan may be a good compromise. 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.
Note: The loans in the table below are a selection of fixed rate and variable rate loans. It's best to speak with the lender about your preferred combination.
Split home loan comparison
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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 how 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 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.
- Offers certainty and flexibility. A split rate loan can give you the certainty that a portion of your loan won't be impacted should interest rates rise, but the flexibility to benefit from any rate reductions and some of the features commonly offered on variable rate loans.
Catherine goes for a split loanCatherine 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 to 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?
There's no one such best split loan. 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 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. If you have any questions don't hesitate to ask an expert.Back to top