People are asking: "Should I fix or split my home loan?" - Raiz Invest

Interest rates in the mortgage market are moving up in the first quarter of 2022. A question we are asked a lot at Raiz Home Ownership is: “should I fix my home loan, or split it?”

 

What is a Split Home Loan?

A split loan is where you split your home loan into two parts: one at a variable interest rate home and the other at a fixed rate home loan rate. For the fixed part, once the fixed rate period ends, your fixed interest rate reverts back to a variable rate home loan.

 

What are the advantages of a split home loan?

By being able to repay the variable component of the split home loan early, it may suit some to have part of a home loan variable interest to be able to take advantage of improved cashflow. Perhaps you are expecting a windfall from selling another asset, like shares or a car. Maybe you are expecting to receive an inheritance, or maybe you will receive a bonus from work. Any of these amounts can be used to pay down the variable part of the loan.

Another possible advantage of a split home loan is by keeping some of the loan fixed, you are protecting yourself from the possibility that interest rates start to increase, as part of the loan will have a fixed monthly repayment attached.

 

Possible risks of taking a split home loan

One possible risk with the fixed part of the home loan is that there are likely to be additional costs if you repay this earlier than the fixed rate term. For example, if you sell the property soon after buying it, you may need to pay penalties associated with ending the fixed component of the loan early, and these could be substantial. If you are expecting to flip a property, a split loan or a fixed loan may not be suitable for you.

Another possible downside is you may not have the choice to have an offset account. This means the interest you could save by having extra funds sitting in the loan account may not be possible with this loan type.

 

The moral of the story

Different loan types will suit different buyers with different expected cashflows and interest rate expectations. There is no one right answer, nor is there one incorrect answer. Try to establish what you can afford to pay and consider what may happen if interest rates were to increase and how this may impact your ability to repay a home loan.

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If you would like to find out more about Raiz Home Ownership, please contact the team at home@raizhomeownership.com.au, or register your interest.

 


 

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