If you are a homeowner looking to pay off your mortgage loan faster, the split loan strategy can help you increase your monthly contributions and reduce your amount owed faster.
Most banks and mortgage lenders have a fixed interest rate product and variable interest rate product (you can read more about them here):
For fixed interest rate mortgages (fixed period usually does not exceed 5 years), borrowers are looking to lock their interest rate in during a period of low interest rates. Therefore, when the interest rate rises again, the borrower will pay interest on the lower locked rate rather than the higher floating interest rate now. This product can help save on the interest costs of your mortgage, but most banks and lenders limit your ability to make extra repayment in further reducing your amount owed.
For variable interest rate mortgage, the interest rate is determined by the bank based on current economic conditions and the official cash rate set by the Reserve Bank of Australia. This floating interest rate means that you may risk higher interest payments if the interest rate is to rise, or vice versa if the interest rate falls. One benefit of having a variable interest rate mortgage is that they often carry product features of extra repayments, where you can make additional contributions to reduce your amount owed without receiving penalties from the lender.
Using the fixed interest rate product to lock a low interest rate on a portion of your loan, and using a variable interest rate product to make extra repayments, combined with product feature of redraws or offset account, you can minimise your loan interest expense and maximise your contributions towards reducing your loan amount, paying off your mortgage faster.
The loan splitting of portion using fixed rate and portion using variable rate is dependent on your ability/willingness to make extra contributions. If you intend to make more extra contributions, it's best if you have a larger portion of the variable loan. If your extra contributions are limited, a higher portion towards a fixed rate loan is most beneficial when interest expense is minimised.
Talk to us for more information, our experts will help you design a borrowing strategy that minimises interest costs and help pay off your mortgage faster.
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