In the media, first home buyers are seeing many different views by economic experts on which direction they think interest rates are headed. For this reason, many aspiring & current first home buyers are unsure whether they should select a variable or fixed rate, or both!
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Choosing a home loan can be very confusing, especially if you are doing it for your first ever time. Beyond the wide choice banks, smaller lenders and other financial institutions, each of them also provides a wide range of loan products, that make the process of choosing a product more difficult. As a result, at FHBA we are seeing first home buyers choose a ‘split loan’ (or combination loan) which gives them with a mix of certainty and flexibility. Learn more about split loans below:
What is a ‘Split Loan’?
A split loan offers the best of both worlds. This option provides security and flexibility – a great option for those that can’t decide whether to choose a variable or fixed rate loan. A split loan allows you to allocate a portion of your loan amount to a variable interest rate, and the rest of the loan to a fixed rate.
A variable interest rate loan fluctuates according to the cash rate, as set by the Reserve Bank, however, there is also nothing stopping the lenders from moving their rates up or down at their own discretion or due to regulatory and funding pressures.
The fixed interest rate loan has a fixed interest rate for an initial period and the repayment period is also fixed which varies from 12 months to 10 years.
What are the benefits of a split loan?
If you have been dwelling over the decision between a fixed rate or variable rate home loan, a split loan may be the most suitable options for you. The only real downside of choosing a split loan is that you may not be able to fully repay your loan whilst you have a fixed rate portion, without significant break costs.
However, there are plenty of advantages or benefits of choosing a split loan over a 100% variable or 100% fixed rate loan. The main advantages include (and reasons why split loans are in fashion now):
- Flexibility – the variable rate component will allow you to get access to features otherwise not available on a fixed rate loan
- Offset account – if your preferred lender offers an offset account, you will be able to utilise the significant interest cost-saving measures an offset account offers
- Certainty – the fixed rate portion of a split loan will give you certainty of repayments for the period of time you choose, ensuring your repayments won’t move up for this portion
- Extra repayments/Redraw – almost every lender will allow you to pay a higher amount off the variable rate portion, which means you can reduce your loan faster and redraw this amount if you need it in the future
- Rising interest rates – having a fixed rate portion means you can protect your loan against potential increases in interest rates
- Falling interest rates – having a variable rate portion means you still receive the benefits if interest rates were to decrease in the future
- Choice – first home buyers can choose how much they want each loan split to be!
Undecided between a fixed or variable rate? Don’t worry your not alone!
How much should be variable vs fixed in a split loan arrangement?
This comes down to personal choice, most lenders will allow you to split the loan in the % you want e.g. 50% fixed / 50% variable, 75% fixed / 25% variable etc… This is a big reason whyy split loans are in fashion!
If you are worried about rising interest rates (which is a common theme across our clients), then a potential strategy could be:
- Considering the period of time, you want to fix a portion of your loan for (i.e. 1, 2, 3, 4 or 5 years)
- Estimating how much you can save in addition to making your minimum monthly repayments over this period of time
- Keep this portion as variable as you can maximise the benefits of an offset account and/or redraw facility
- Keep the remainder of the loan fixed as this will ensure you have certainty for a larger proportion of your loan
What are the best split loan rates available now?
As of now (October 2017), FHBA Mortgages has access to some great split loan offers, with the best being available only to first home buyers!
The information for this product is as follows:
Variable rate component – 3.79% (Comparison rate 3.80%)
Fixed rate component – 5 years at 3.99% (Comparison rate 3.88%) or 3 years at 3.79% (Comparison rate 3.79%)
Other important features of this product include:
- Available to first home buyers only
- Annual fee waived for the life of the loan (potential savings of up to $11,250 over the life of the loan)
- 100% offset account available on the variable portion
- Borrow up to 95% of the property purchase price
Want more information on a split loan or are you interested in applying?
Right here! Our specialist first home buyer mortgage broking service called FHBA Mortgages is a complimentary service which assists first home buyers every day with all their first home loan needs, regardless of whether you are looking for a split loan or a standard first home loan.
Are you currently in the market for your first home loan? To get started or book your complimentary consultation with an expert FHBA Coach, simply complete the form below and your Broker/Coach will be in touch within 24 hours.
Written By,
Taj Singh
FHBA Co-Founder
Disclaimer: The information on our website including this page is general in nature and should be solely relied upon. The advertised rates above were true and correct at the time of the publication. The rates do not take into account other fees and charges which you should also consider. The credit license responsible for the mortgage service offered to clients is Mortgage Australia Group Pty Ltd, Australian Credit License (ACL) number 377294, Australian Business Number (ABN) 99 091 941 749. Mortgage Australia Group Pty Ltd is a member of the Mortgage & Finance Association of Australia (MFAA). FHBA Pty Ltd is an authorised credit representative of Mortgage Australia Group Pty Ltd. You should seek professional advice when obtaining finance and purchasing your first property.
