Benefits of Split Home Loans in Northern Beaches: Why They Could Be Your Best Financial Move

Navigating the Sydney property market can feel like trying to surf a wave that never settles. And in the Northern Beaches, where lifestyle meets high property demand, choosing the right home loan is crucial.

 

Enter the split home loan—an option that combines the best of both fixed and variable interest rates. This guide will help you understand the benefits of split home loans, how they work, and whether they’re right for your situation.

We'll explore the latest data from 2024, share insights into the Northern Beaches market, and dive into a real-life case study. Plus, if you’ve got questions, our mortgage brokers at Northern Beaches are just a call away.

What is a Split Home Loan?

A split home loan divides your mortgage into two portions: one part is on a fixed interest rate, while the other is on a variable interest rate. This gives you the security of fixed repayments while allowing you to benefit from any drops in variable rates.

Imagine splitting your $1 million mortgage into two: $500,000 with a fixed-rate loan for five years and $500,000 with a variable-rate loan. The fixed portion offers stability—your repayments won’t change, even if interest rates rise. Meanwhile, the variable portion allows flexibility; if rates drop, your repayments will decrease, and you can make extra payments without penalty.

Example:

• Fixed Portion: $500,000 at 5.00% for five years.
• Variable Portion: $500,000, starting at 4.50%, with potential rate decreases or increases during the loan term.

What Are the Benefits of a Split Home Loan?

Choosing a split home loan can offer a well-rounded approach to managing your mortgage, especially in dynamic markets like Northern Beaches, Sydney. Let’s break down the key benefits that make this loan type an attractive option:

1. Stability with Fixed Repayments

The fixed portion of your loan ensures that part of your repayments remain constant, even if interest rates rise. This stability makes budgeting easier, giving you peace of mind for a set period of time.

2. Flexibility with Variable Rates

The variable portion allows you to take advantage of rate drops, potentially lowering your monthly repayments. This flexibility can save you thousands over the life of your loan.

3. Extra Repayment Opportunities

Variable rate portions often come with the ability to make unlimited extra repayments without penalty. This means you can pay down your loan faster when you have spare cash, reducing your loan balance and interest over time.

4. Access to Redraw Facilities

Many split loans include a redraw facility on the variable portion, letting you withdraw extra repayments if needed. This feature adds a layer of security, giving you access to funds in case of unexpected costs.

5. Offset Account Benefits

You can link an offset account to the variable portion, reducing the amount of interest you pay. By parking your savings in an offset account, you effectively lower your loan balance, cutting down on interest costs.

6. Protection Against Rate Hikes

The fixed-rate portion shields you from sudden rate hikes, offering a buffer in uncertain economic times. This can be particularly beneficial if you're concerned about future rate increases affecting your loan repayments.

7. Tailored Loan Structure

A split loan allows you to tailor your mortgage to suit your financial goals. Whether you prioritise repayment certainty or flexibility, you can design your loan to match your needs.

8. Lower Break Costs

Compared to fully fixed loans, split loans can come with lower break costs if you decide to refinance or pay off your loan early. This flexibility can save you money if your financial situation changes down the track.

2024 Northern Beaches Property Market Insights

The Northern Beaches property market is renowned for its high demand and rising property prices. In 2024, median house prices in suburbs like Manly have climbed to $3.5 million, while Narrabeen’s median sits at $2.3 million, according to CoreLogic. Property values are expected to grow due to limited supply and strong demand.

Homeowners here are looking for ways to manage their mortgages effectively. Given the current interest rate environment, where the RBA’s cash rate is holding steady at 4.10%, split home loans are becoming an attractive option.

Case Study: Northern Beaches Family with a Split Loan

The Smith family recently purchased a home in Avalon Beach for $2.5 million. They opted for a split home loan, dividing their $2 million mortgage into a $1 million fixed-rate portion at 4.95% for three years and a $1 million variable-rate portion starting at 4.60%.

Their fixed rate offers certainty in their repayments, while the variable portion allows them to make additional payments without penalty. 

Over the first year, they made $20,000 in extra repayments on the variable portion, reducing their loan balance faster. If the RBA cuts rates, they’ll benefit further, but even if rates rise, half of their mortgage remains unaffected.

This split loan structure gave the Smiths peace of mind and the flexibility to manage their finances while enjoying their new home.

How to Calculate Your Split Loan

Calculating a split home loan involves determining the right balance between fixed and variable portions. Here’s a quick breakdown:

Determine Your Total Loan Amount

• Start with your total loan amount. For example, $800,000.

Decide on the Split Ratio

• Choose a split, like 60/40. This means $480,000 will be fixed, and $320,000 will be variable.

Calculate the Fixed Portion

• For the fixed $480,000 at 5.00% interest over 30 years, the monthly repayment might be around $2,577.21.

Calculate the Variable Portion

• For the variable $320,000 at 4.70% interest, the monthly repayment might be around $1,654.30.

Add Up the Monthly Repayments

• Total monthly repayment = $2,577.21 (fixed) + $1,654.30 (variable) = $4,231.51.

Use a Split Loan Calculator

• To simplify, use a split loan calculator to quickly see how different ratios affect your repayments.

Adjust Based on Your Financial Goals

• After calculating, consider whether the split ratio meets your needs. You might adjust the split to increase flexibility or stability, depending on your financial situation.

Key Considerations Before Choosing a Split Loan

Before you dive into a split loan, there are several factors to weigh:

1. Fixed vs. Variable Rate Trends: Study the trends in interest rates. The RBA’s cash rate changes impact variable rates, while fixed rates are generally higher in a rising rate environment. Check historical data and forecasts to decide the best proportion for your split.
2. Your Financial Goals: Are you planning to make extra repayments? Do you need the certainty of fixed repayments, or are you comfortable with some rate fluctuations? Your answers will guide how you split your loan.
3. Break Costs and Fees: Fixed-rate loans often come with break costs if you pay them off early or refinance. Ensure you understand these potential fees and how they might affect your loan’s flexibility.
4. Loan Term and Repayment Type: Consider how long you plan to hold the loan and whether you prefer principal and interest repayments or interest-only options. These choices will affect your loan structure.
5. Access to Additional Features: Variable loans typically offer more flexibility, including access to features like redraw facilities and offset accounts. Make sure these features align with your needs.

FAQs

What is the main benefit of a split home loan?

A split home loan offers the advantage of balancing your mortgage across fixed and variable home loan interest rates, providing stability in your rate term while allowing flexibility in your loan options.

Can I change the split of my home loan later?

Yes, some lenders allow you to adjust how your split rate home loan works by altering the split between the fixed and variable portions. However, be aware that this might come with break fees and other costs.

How do I decide the right split for my home loan?

Consider your financial goals, the current loan interest rates, and how you expect rates to move over the loan period. Consulting with loan specialists can help you find the ideal split to suit your needs.

Are there any risks with split home loans?

The main risk lies in the variable home loan portion, where loan rates could increase. However, the fixed portion of your split home loan works as a safeguard, providing protection against unexpected rate hikes.

What happens if I want to refinance my split loan?

Refinancing a split loan can trigger break fees, especially for the fixed-rate portion. It’s important to consider these fees and the potential savings from a lower Comparison rate before making a decision.

Can I make additional repayments on a split loan?

Yes, you can typically make additional repayments on the variable portion of your split home loan. However, there may be restrictions on extra payments for the fixed portion of your loan package.

What fees should I be aware of with a split loan?

Common fees include establishment fees for setting up your loan, break fees if you refinance during the fixed rate period, and ongoing monthly service fees for maintaining separate accounts within your loan package.

How do split home loans compare to other loan products?

Split loans offer a mix of the benefits found in other loan products by combining fixed and variable rate options. They provide more flexibility than fully fixed loans and more stability than fully variable loans.

Can split home loans be used for investment properties?

Yes, split home loans can be an excellent choice for investment home loans, allowing you to secure a fixed rate for part of your loan term while keeping another portion variable to take advantage of any rate decreases.

What is the impact of split home loans on loan terms?

The structure of a split home loan works to balance your loan terms, offering predictable repayments on the fixed portion while the variable rate portion may fluctuate, potentially shortening your overall loan term if rates decrease and you make extra repayments.

Wrapping Up

Choosing the right home loan is all about finding a solution that fits your unique financial situation. A split home loan offers a balanced approach, giving you the best of both worlds with stability and flexibility. By understanding how split loans work and considering the current market conditions, you can make an informed decision that benefits you in the long run.

If you’re still unsure about the best loan structure for your needs, our team at Mortgage Brokers Northern Beaches is here to help. We’re ready to answer your questions and guide you through the process. Give us a call at 0403 316 686 or visit Mortgage Brokers Northern Beaches to start your journey toward the perfect home loan today.