What is a split loan?
Should I fix, should I go all variable?? The decision is very much like Seinfeld in the drug store choosing between headache pills that are quick acting or long lasting, he asked, “Do I want to feel better now or later?!” What if you could do both at the same time?!
Splitting the loan gives you all the extra features that come with a variable loan such as the ability to make extra repayments, redraw back those extra repayments and use your wages in your day to day account to offset interest charged, with the certainty of a fixed rate, which has none of those features.
Typically a 25 / 75 variable fixed ratio is good but you can choose any ratio you wish. (The variable portion must be enough to accommodate any lump sum payments you can foresee making because extra repayments to the fixed loan are very restricted).
Providing you aren’t leaning toward a basic variable loan, having some variable in a split loan gives you an offset account. The offset results interest saved just by doing your regular banking into a linked transaction account. If you have $500 in the offset you’re not paying interest on $500 of the variable home loan for that day. It is free money, no hassle at all.
Also, lenders often like it when clients bundle a variable loan into the mix because it means they will get your day to day banking so they sometimes offer you a discount off the fixed rate as an added incentive.
The only risk of fixing is rates could go down. It is like the tide going out and being stuck on an island. You can’t just swap out of the fixed to a variable in that event, there’d be a prohibitive exit penalty.
Your broker will guide you through this decision, based on news of the day. You can fix some or all of the loan now, or later down the track. Right now, rates seem steady but there is some chatter about rises this year at some stage.
Looking at historical rates, the fixed are very low and offer peace of mind your repayments wouldn’t go up for a set period. Of course, the downside is repayments wouldn’t go down if rates were cut. It is common for clients to fix and find themselves paying more than they needed to but fixing isn’t to beat the banks and get the lowest fixed rate ever it is to cover yourself against rising rates. I see fixed rates as an insurance premium, you may pay a bit more for security. You don’t look back each year and wish you hadn’t paid your contents insurance because you didn’t make a claim!
Marc has been a professional lender for 28 years. After beginning his career in 1990 with a UK Building Society, he moved to Australia where he held several different retail banking roles. In 1999 it became clear to him that a mortgage broker would eventually become an obvious choice for someone looking for a home loan so he took the plunge and became an independent broker. He hasn’t looked back since!