To fix or not to fix – or is there another question?

Most clients I meet are familiar with the terms fixed and variable when it comes to different loan types. A variable interest rate loan is exactly that; the rate varies dependent on the lenders change of rate, usually chiefly influenced by the rates of interest issued by the Reserve Bank of Australia. A fixed rate loan again is relatively straight forward; the interest rate is fixed, and in turn so are your repayments for the pre-determined period you elect to fix your loan.

The benefit of a fixed rate is that you can lock in a great deal and protect yourself against future interest rate rises. However, if your income, or situation changes, for instance if you are planning on selling your home, a variable rate is preferred as the penalties for breaking a fixed rate term can be hefty.

Less well known is the split loan.
A split loan allows you to take advantage of both a variable and a fixed rate term. Literally your outstanding balance is split with how much of your loan you would like to fix and how much you would like to leave variable. This is a great choice for clients who want the reassurance of a fixed product but can choose to leave a portion variable to make extra repayments or utilise an offset facility to lower interest calculated on the outstanding balance.As an example: say Jack and Mary have a mortgage of $500,000 against their home worth $750,000. Jack and Mary are worried interest rates might rise next year but also want to keep making extra repayments to help own their home outright faster. In discussion with their broker, they explain with their current incomes they believe they could pay down their mortgage by a maximum of $100,000 over 3 years. Because of this, their broker recommends a split facility with $400,000 fixed for 3 years at 4.16% and a variable rate loan with an interest rate of 4.16% with an offset account attached to lower the interest payable. No extra fees or establishment costs would be incurred and more importantly, if rates rise in the next 3 years, Jack and Mary have limited how much interest they will pay because the majority of their mortgage is locked in at the lower rate. It’s a pretty smart way of hedging your bets, so to speak, and giving yourself peace of mind.  Also, Jack and Mary are still able to make extra repayments to become debt free sooner.

Each client’s situation is different. To know if a split loan or another type of facility is the right option for you, give me a call on 03 9596 3167 or 0439 062 771 for a no obligation chat about how you might pay off your loan faster.

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