Enjoy the best of both worlds with a split rate home loan

If you can’t decide between fixed or variable, a split rate home loan could be just what you’re looking for. With a split rate home loan, you get the certainty of a fixed rate loan while enjoying the flexibility and features of a variable rate loan. So, you really can have it all.

What’s the difference between the three you ask? We’ve broken down the different types of home loans available and what to look for when considering which is best for you.

Variable rate home loans

Variable rate home loans move with the times, either going up or down as the official RBA cash rate changes or as your lender makes changes. If interest rates go down, you can enjoy lower repayments, and if rates rise your repayments will go up.

One of the biggest benefits of choosing a variable home loan is that you can access greater flexibility. If you want to make extra repayments, add an offset account or redraw facility, or refinance, that can all be done with no fuss when you have a variable home loan. The ability to make extra repayments can also take years off your home loan, meaning you could own it outright sooner.

What’s so good about a variable home loan?

• When interest rates drop, so will your repayments.
• Most variable products let you make extra repayments, so you can pay your loan off sooner.
  You can refinance at any time – there’s nothing holding you back.
• You can benefit from redraw facilities or an offset account, so you can make your savings work harder for you.

What are the potential drawbacks?

• Depending on what’s going on in the economy, you could be at a higher risk if interest rates rise.
• Your repayment amount would change as rates rise or fall, meaning less budget certainty.
• Lenders can change their interest rates independent of RBA cash rate decisions.

Fixed rate home loans

A fixed rate home loan lets you lock in an interest rate at a point in time for a set period of usually between one and five years. This means you’ll have rate and repayment certainty during uncertain times or when markets may move. If the RBA cash rate rises, you’ll be safe knowing you’ve locked in your rate. This also means your repayments won’t change during that fixed rate term, making budgeting a whole lot easier.

The rate will default to the variable rate set out in your contract at the end of the fixed term, but you’ll usually have the choice to enter another fixed rate period, although it’s likely the interest rate would be different.

Why choose a fixed rate home loan?

• You’ll be protected against interest rate rises.
• It’s easier for you to budget and organise finances with certainty.
• You can rely on consistent loan repayment amounts.

Why wouldn’t I go with a fixed loan?

• The interest rates could drop further, and you’ll be locked into a fixed rate.
• There’s usually limited access to loan features, such as 100% offset accounts.
• Generally, you won’t be able to make extra repayments.
• You can be charged a fee to break your fixed rate contract if you refinance, overpay your loan or sell your home.

Split rate home loans

A split rate home loan lets you split your total loan value into two loans – some to a fixed interest rate loan and the remainder to a variable rate home loan. The flexibility of the variable rate loan means it can be paid off quicker if you wanted to, with the ability to redraw or shorten the term of the loan. Whereas the fixed rate loan gives you security knowing that part of the loan is not subject to rate changes.

Split rate loans are a great option if you want the best of both worlds – you can make the most of low rates and pay off your home sooner, while having peace of mind knowing that a portion of the loan is locked to an agreed rate for a set time.

What are the benefits of a split rate loan?

• More flexibility, choosing the portion of the loan to fix and the portion that will be variable.
• If interest rates drop, you’ll enjoy the lower rate on the variable portion of the loan.
• Security knowing a portion of the loan is fixed, so even if rates rise your repayments will stay the same.
• Access to all the features that come with a variable rate loan, such as offset account, redraw facility and potentially the ability to pay down that portion of the loan sooner.

What are the potential cons?

• Split rates are not available for all home loans, so you may have limited choice in products.
• If rates drop, you won’t benefit from this on the fixed portion of the loan.
• Less certainty when budgeting as you could see an increase in repayments on the variable portion of the loan if rates rise.
• Break fees if you decide the refinance or change loans during the fixed term period of your split home loan.

There are pros and cons to fixed rate, variable rate, and split loans, so it’s important to make sure you do your homework and select the loan that works best for you and your circumstances. To find the loan that suits you best, you need to assess your situation, speak to your lending institution and weigh up the options.

If you’re unsure where to go for more information, or if you have any questions about the home loan process, you can call us on 13 25 77. Alternatively, book an appointment to speak with a specialist in branch, online or over the phone. If you have a broker, they'll also be able to assist you.