Fixed home loan? Variable home loan? Instead of choosing between a fixed or variable home loan, you may consider “getting the best of both worlds” by taking out a split home loan.
In this article, I will be talking about split home loan pros and cons to help you decide whether or not this is the right loan option for you.
What is a Split Home Loan?
A split home loan enables you to split your home loan into different accounts that draw different interest rates. You can allot as much as you want to each account, as long as it is allowed by your lender. The allocation of your preferred interest rate model is normally up to the investor, so you can split your loans 60/40, 80/20, 50/50, or however you prefer.
Generally, split home loans are used by investors who want both flexibility and security. It is ideal for investors who want to be able to manage the risk of rising interest rates while still being able to maintain the ability to make extra repayments.
Split Home Loan Pros and Cons
Below, I will list down some split home loan pros and cons to help you determine if this type of loan is the right option for you.
Pros
By splitting your home loan into two – one fixed and the other variable – you can enjoy the advantages of both while reducing the effect and risk on each option. In particular, a split home loan offers the following advantages:
- Security. The fixed-rate portion of the loan gives you the chance to manage the risk of interest rate fluctuations. This protects you from sudden interest rate increases.
- Flexibility. The variable rate portion is rather risky since there is the risk of an interest rate increase. However, the flexibility of the variable-rate portion enables you to take advantage of potential decreases in interest rates.
- No Restrictions. There aren’t any restrictions on how you split your home loan, whether its 60/40, 80/20, 50/50, or however you prefer.
- Unlimited Repayments. On the variable side of the loan, you can make unlimited extra repayments. This means that you can quickly reduce the size of the loan.
Cons
Just like everything else, a split home loan comes with its own disadvantages as well. Here are some of them:
- Significant Increase in Mortgage Payments. During the initial fixed-rate period of a split home loan, you will enjoy low monthly payments; however, you could pay for it later on. You may see a significant increase in mortgage payments during the adjustable-rate period.
- Missed Rate Reduction. With a split home loan, you might miss out on the potential interest rate fall on the fixed portion of the loan.
- Increased Repayments. Since a portion of the loan is variable, you might end up paying more if the interest rate increases.
- Additional Fees. With a split home loan, you may encounter additional fees. These additional fees may include account-keeping costs that may be charged on both the fixed and variable rate sides.
The Takeaway
All types of home loans have accompanying pros and cons.
If you need help in analyzing split home loan pros and cons and deciding whether to use it or not, let me help you. With my expertise, I can guide you and help you see if this type of loan works best for you. Feel free to send me a message at [email protected]. Let’s talk about your needs today.
If you need expert advice, don’t hesitate to send me a message at [email protected]. I look forward to hearing from you!
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Will Bell Mortgage Broker is a mortgage and finance broker based in Melbourne specializing in residential home loans. Will is all about the average Australian understanding just enough of the broader economy to take action on your own personal economy. He is the host of the My Personal Economy Podcast which you can check out here.
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