When you begin your home loan journey, you’ll eventually find yourself at a crossroads: should I choose a variable rate home loan or a fixed rate home loan? If you’re stuck and uncertain of which path to take, you could always choose a third option: a split rate home loan.
And in the current times of economic uncertainty due to the Coronavirus pandemic, a split rate loan may help you manage the potential risk of a recession on your finances.
The benefits of a split rate home loan
As the name suggests, a split rate home loan involves selecting a portion of your loan to be fixed and the remaining portion to be variable.
For example, on a $500,000 mortgage, you may choose to have $350,000 on a lender’s fixed rate for a set period of time, and $150,000 at a variable rate. This means 70 per cent of your loan repayments will remain the same for the fixed period, and 30 per cent is subject to market fluctuations.
There are several benefits and disadvantages to variable and fixed rate loans individually. The main benefit of a split rate home loan is that you get the best of both worlds for your mortgage repayments, including:
1. Protection from market fluctuations
Variable home loan rates are influenced by the Reserve Bank of Australia (RBA)’s cash rate. If the cash rate decreases, lenders may decrease their variable rate loans too, and vice versa if the cash rate increases. Over a 30-year loan, variable interest rates will always fluctuate, and this is why some more-cautious borrowers favour fixed home loans in the event that rates hike.
By fixing a portion of your home loan, and leaving another portion to be variable, you’re protecting part of your mortgage repayments from any potential cash rate hikes. A split rate home loan may help you mitigate the risks of interest rate fluctuations on your budget in times of economic unpredictability.
On the flip side, if a portion of your mortgage is variable and the cash rate does decrease, then that portion of your loan will decrease your mortgage repayments.
The last cash rate cut came in mid-March in emergency response to the economic impacts of the Coronavirus pandemic. Yesterday, RBA Governor Philip Lowe caused speculation that the next cash rate cut may come as soon as Melbourne Cup day, stating that “as the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier”.
In fact, for borrowers with variable home loan rates, a cash rate hike may not come for a few years still, with Governor Lowe expressing a need for actual inflation to reach target range before they’ll consider it.
Just as no one could predict a global pandemic in 2020, no one can predict the bottom of the interest rate market. But a split rate home loan may allow borrowers to enjoy rock-bottom variable mortgage rates a little longer, while protecting the remaining portion with a fixed rate.
3. Budget stability
A major benefit of fixed rate home loans is that you’ll never be shocked at what your mortgage repayments are. Compared to variable rate loans which may see your interest rate change multiple times a year, a fixed rate loan allows you to lock in an interest rate for a set period of time. This allows for greater stability in your budget over the years your loan is fixed.
For uncertain borrowers and those not used to the ‘gamble’ of variable rate loans, a split rate mortgage means a portion of your mortgage repayments stays at a level you can manage, while the remaining portion takes on that risk.
4. Access to features
One downside of fixed rate home loans is that they do not commonly come with the same features a variable home
loan offers, such as an offset account, redraw facility or the ability to make extra repayments.
By choosing a split rate home loan you allow yourself access to these features typically locked away from fixed rate home loan holders. You could have 60 per cent of your home loan fixed, but also still enjoy the flexibility of an offset account
5. No restrictions on how you split
Another benefit of a split rate home loan is that you decide just how you want to divide up your home loan balance, whether 50/50, 60/40, 70/30 or greater.
If you’ve done your research into the economy and have decided that interest rates will increase, you may choose to fix a larger portion of your mortgage. Or if you’re confident that this low-rate environment will stick around for a fair few more years, you may choose to have a greater percentage of your loan on a variable interest rate.
Whichever home loan rate you choose, Reduce Home Loans has you covered. As Australia’s leading low-rate lender, we strive to ensure Australian households keep their biggest ongoing expense down.
Reduce Home Loans allows for split rate home loans on a number of its products. For more information, you can compare our home loans, or get in touch today.
Any statement/s are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.