Are split home loans for you? We find out and compare the options you have.
Split home loans
August 30th, 2010
Split home loans have an interest rate that’s split into a fixed rate and a variable rate component. This provides some of the cost advantages of a cheap variable rate mortgage while at the same time some of the certainty of a fixed rate.
Variable rate mortgages are usually tied to the standard variable rate charged by the bank, which is in turn related to the overnight cash rate set by the Reserve Bank of Australia. If the RBA tightens monetary policy by raising the overnight rate, mortgage repayments become more expensive. If the RBA relaxes monetary policy and lowers the overnight rate, mortgage repayments are less.
Over time, fixed rate loans tend to be more expensive than standard variable rate loans, as they don’t decrease with the overnight cash rate but remain at the higher level. Fixed rate home loans are also more likely to have early redemption penalties.
Split home loans are an attempt to pull both these elements together and give the best of both worlds. The “split” in the definition is between the bank’s variable and fixed rates. For example, if the bank’s variable rate was 7% and the fixed rate was 8% then the split rate on a 50:50 mortgage would be 7.5%. If the variable rate was increased to 9% then the split rate would be 8.5%, and if the variable rate decreased to 6% then the split rate would be 7%. The fixed rate of course would remain at 8%.
A split rate will not guarantee the home owner is fully shielded from changes in interest rates, but the effect of changes will be somewhat muted. It is the blending of the full safety of the fixed rate and the variable rate’s cost-effectiveness that provides the advantage.
Other combinations of the loan elements can be made. The loan may be a 75:25 combination, with a larger fixed element and a smaller variable one. This can be reversed as well. With most mortgage products it is now possible for the home buyer to choose his or her preferred split.
It is important to remember that the fixed rate element to the split home loan will have a limited life, as rates are never guaranteed over the full life of the mortgage as they are in the United States. The lifespan for fixed rates is usually between one and three years.
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Split Home loans, Disadvantages to a Split Rate Home Loan, The Benefits of a Split Rate Home Loan, Home Loans for self builders, ANZ home loansTags: home mortgage, split home loans
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