A split home loan, also known as a “combination” loan, offers the attractive features of both variable and fixed loans. With a combination loan, a borrower has their loan broken into two parts. One part has a fixed interest rate, while the other part has a variable rate. Essentially, there are two loans under the total amount. The fixed piece of the loan offers the security of a set payment amount while the variable piece gives the potential savings of an amount that fluctuates with changing interest rates.
Also known as a “combination loan,” a split home loan merges the features of a variable rate loan and a fixed rate loan. A split loan is not exactly a separate loan type, though. It is actually a feature of an existing loan that can be applied during the loan set-up process or, in some cases, added to an existing loan during the life of the loan. In a split loan option, the mortgage is divided into two parts. One part of the loan has a fixed rate while the other has a variable rate. The split is determined by you and the lender and is usually 40-60 or 50-50. The time frame of the split is also determined by the borrower and the lender. The split term does not have to be the entire life of the loan.
Advantages of Split Home Loans
A split home loan is an attractive option for buyers who like the flexibility and possible savings of variable rate home loans, but who also would like to enjoy the stability of a fixed rate loan. Part of the loan payment changes with the Reserve Bank of Australia’s monetary policy, while part of the loan keeps the same fixed rate negotiated during the loan setup. Split home loans offer a hedge against unstable markets while at the same time granting savings and stability. They are the best of both worlds.
Disadvantages of Split Home Loans
The drawbacks of split home loans are the combined disadvantages of their composite parts. If the housing market becomes volatile, the variable portion of the split loan can grow to the point where it may become a liability to the borrower. Likewise, should rates drop, the borrower will only realize half or maybe even 40% of the benefit that a standard or basic variable rate borrower would. IN this situation, the variable rate could drop below the fixed rate and the borrower would be “paying too much” for half the loan.
Other possible disadvantages are fees and penalties. Like many loan types, there are usually fees for adding this feature to a loan during the loan set-up process. There could also be fees for converting an existing loan to a split loan during the life of the original loan. Finally, overpayment penalties may be incurred for buyers looking to take advantage of lower rates and paying higher amounts in order to pay off the loan. As always, it is important for savvy home buyers to get all the information available before selecting the split loan option. For more information on split home loans and all other loan types, please fill out the contact information form below.