Split Contract Home Loan

A split contract home loan is a type of mortgage that allows you to split your loan into two parts – one part with a fixed interest rate and the other with a variable interest rate. This can be a great option for homebuyers who want the security of a fixed rate, but also want the flexibility of a variable rate.

How does it work?

A split contract home loan works by dividing your mortgage into two separate parts – one with a fixed interest rate and the other with a variable interest rate. The fixed-rate portion of the loan means that your interest rate will remain the same for a set period of time (usually between one and five years), regardless of any changes to the official interest rate set by the Reserve Bank of Australia.

The variable-rate portion of the loan means that your interest rate will fluctuate in line with changes to the official interest rate set by the Reserve Bank of Australia. This means that your repayments may go up or down, depending on changes to the official interest rate.

What are the benefits?

One of the main benefits of a split contract home loan is that it gives you the best of both worlds – the security of a fixed rate and the flexibility of a variable rate. This means that you can take advantage of any potential rate cuts on the variable portion of your loan, while also having the security of a fixed rate on the other portion.

Another benefit of a split contract home loan is that it can help you manage your cash flow. By having a portion of your loan with a fixed interest rate, you can budget and plan your repayments more effectively, knowing that your repayments will remain the same for a set period of time.

Additionally, a split contract home loan can help protect you against rising interest rates. If interest rates rise, your repayments on the variable portion of your loan will increase, but your repayments on the fixed portion will remain the same. This means that you will be able to manage any potential increases in your mortgage repayments more effectively.

What are the drawbacks?

One potential drawback of a split contract home loan is that it may be more expensive than a standard variable rate home loan. This is because you are paying for the security of a fixed rate on a portion of your loan.

Another potential drawback is that you may not be able to take advantage of potential rate cuts on the fixed portion of your loan. If interest rates fall, you may be stuck with a higher interest rate on the fixed portion of your loan.

Ultimately, whether a split contract home loan is right for you will depend on your individual circumstances and financial goals. If you are unsure whether a split contract home loan is right for you, speak to a mortgage broker or financial adviser who can help you weigh up the pros and cons and make an informed decision.