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Is splitting your home loan a good idea?

When it comes to your home loan there’s more than one way to skin a cat. There are different interest rates, loan structures, add-ons, repayment terms and a number of other options that fundamentally alter the way that you manage and repay your loan.

One detail that we’ve been asked about a lot recently is splitting your interest rates – we generally recommend doing this for a number of reasons, but it may not be for everyone. To help make your decisions easier (and better informed) John Bolton – Chief Squirrel and a man who knows his way around a home loan – has gone over the basics of splitting your mortgage in this week’s video.

Bar graph showing increasing ratesIs a fixed, variable or split interest rate right for you?

What exactly does splitting your home loan mean?

Your basic home loan has one interest rate, fixed or variable – to understand what splitting your loan means we must first know the basics on these two terms.

By splitting your interest rate, a portion of your loan will be fixed, and a portion will be variable. Why might this be a good idea?

A fixed interest rate is locked in for a certain period (usually one, three or five years). This means that during that period your mortgage repayments will stay exactly the same, and that you’ll be able to lock in low market interest rates. However, it also means that you may have less flexibility with your repayments, and that your mortgage repayments may suddenly rise when the fixed period ends.

A variable home loan rate, on the other hand, changes with the market, the official cash rate and economic conditions at the time. This means that your repayment amounts will change, that you’ll have plenty of flexibility with how you repay your loan, and that your loan is vulnerable to any increases in market interest rates.

By splitting your interest rate, a portion of your loan will be fixed, and a portion will be variable. Why might this be a good idea?

These are the pros

Having your entire loan on the same fixed or variable rate can be risky. For example, if your loan is 100 per cent fixed, and interest rates rise considerably by the time your one, three or five-year period ends, your mortgage repayments will suddenly increase, which could make them far more difficult to afford. Westpac’s most recent economic report and a number of other industry commentaries suggest that interest rates are set to rise, so this is more relevant than ever right now.

By splitting your loan, you’ll soften the blow of market changes and ensure your entire mortgage isn’t maturing at the same time. That way your repayments shouldn’t suddenly increase by a large amount, and you’ll effectively be getting the best of both worlds.

Piggy bank and house seesawWhat kind of home loan is right for you?

Here are the cons

Splitting your loan is a good decision for most but it’s not all roses. Setting your loan up may require a little more technical knowledge, and to be sure you’re making the best decisions it’s best to seek professional advice before committing to anything.

It may also make it more difficult and expensive to refinance, as several lenders will charge you extra fees for taking over a split loan.

At the end of the day, everyone’s situation is different and each home loan’s structure should reflect that. If you’re not sure what’s right for you, get in touch with a local Squirrel mortgage broker.

Our team are all experienced mortgage professionals, and we’d love to help you get the most out of your home loan – no matter your situation.