September 15, 2010
Regardless of the Reserve Bank of Australia’s announcement earlier this month that the cash rate will remain at 4.5 percent for the fourth month in a row, there are rumours that the cash rate could increase towards the end of the year or early next year. If these rumours turn out to be true, the decision on whether borrowers should fix or not could be a little easier, that is if you choose to split your loan.
Variable rates fluctuating while some fixed rates are low
When the home loan market is unstable, knowing whether to fix your home loan or not can be difficult. However, opting to split your loan could mean that you may be able to get the best of both worlds, especially while many fixed-rate terms are low.
According to RateCity, while the cash rate has remained stable since May at 4.5 percent, the average standard variable rate is currently 7.05, percent, which is 28 basis points higher than in May.
Meanwhile, the average two-year, three-year, four-year and five-year fixed rate home loans have been dropping since May.
Hedge your bets with a split loan
While fixed rates are low, it’s a great time to lock in a percentage of your mortgage, that way if rates do rise that part of your mortgage won’t be affected for the term that it’s fixed. But if rates fall, the portion of your loan that is variable may decrease too so your repayments will be less. However keep in mind that if they do rise your repayments will increase.
By splitting your mortgage, you will be taking less risk and protect yourself against possible rate increases compared to what you would if you decide to lock your entire loan to either fixed or variable.
Get the most of each portion
While splitting home loans may not be for everyone, if you are considering a split home loan, here are some tips on how to get the most of your loan should you choose to split it.
- Work out what percentage you would like to allocate to a fixed rate and how much variable. Some people choose to split their home loan evenly – such as half at variable and half with a three-year fixed rate -so that if rates were to rise at least they will be 50 percent better off.
- If you can, make additional repayments as you will pay off your loan sooner and pay less in interest.
- Because you will essentially have two loans, consider all the fees involved. Look for loans that offer lower setup and ongoing fees to save more.
- You can choose to split more than once but be careful as this could cost you a fee.
- The great thing about splitting your loan is that you don’t have to use the financial institution for both portions. So you can shop around and find loans with a lower rate. Compare home loans online to find a variable and fixed-rate home loan with a low interest rate.