With interest rates at all time low’s, you may be thinking now is a good time to fix your home loan, lock in a low interest rate and protect yourself against any future interest rate rises.
If you do fix your home loan one thing to remember is that most lenders will restrict the amount of extra repayments you make and take away the ability to redraw any additional funds you have paid into the home loan. In addition to this you will no longer have the ability to have an offset account in most cases.
This is often a real turnoff for people who like the ability to pay extra into their home loan and use it as a savings account to try pay less in interest and get their loan down ahead of time.
One way to achieve locking in a fixed rate and keeping the flexibility of paying extra is to split your loan into a mix of fixed and variable.
Consider a couple who have a $500,000 loan which they wish to try pay $250 a week extra into but would also like to lock in a fixed rate in case interest rates start to rise. One option they could take is to split the loan into (for example) $400,000 fixed for 3 years at 3.79% and $50,000 variable at 3.9%.
By doing this it
- Allows them to pay extra into the $100,000 portion and have the ability to redraw back on these funds should they need to in the future. At $250 a week over 3 years, they will have paid $39,000 extra into the home loan, and would therefore still have some room to left to make further additional repayments should they choose to do so.
- Locking in the majority of their loan, $400,000 at a fixed rate for 3 years. This way if interest rates do start to increase, the majority of their loan is protected and if rates increased by 0.25%, their repayments would increase by only $8 on their variable portion of the loan. However if all of their home loan on variable, a 0.25% interest rate increase would trigger a $72/month increase in repayments.
As you can a split loan can give you the best of both worlds when it comes to fixed and variable loans. However it is important to remember if you are looking to payout your loan in the near future through sale or refinancing, large break fees can apply on the fixed portion of your loan.
