How Splitting Your Mortgage May Lengthen Your Repayments

But she liked the flexibility of being able to keep part of her loan as a variable, and the security of knowing that much of it will stay at the same rate while retaining convenient features, like a compensatory account.

A compensatory account is a transaction account linked to a mortgage that allows deposits and withdrawals while reducing the amount of interest charged on the mortgage.

It is also possible to make additional payments without penalty and use a withdrawal function to withdraw additional payments.

Lim, who has two sons, Ethan, 16, and Bryan, 14, adds, “I always have money in the account for other purposes when needed.

Variable rates are expected to continue falling as competition for new business remains fierce and lenders have not passed on all of the recent spot rate cuts.

After the RBA cuts of March 19 and November 3, 2020, the majority of banks did not pass anything on to their variable customers.

Meanwhile, fixed rates continue to rise in response to the RBA saying it was abandoning its policy of controlling the yield curve but keeping the spot rate at an all-time high of 0.1%.

Check the fine print

Borrowers should check the fine print of a loan.

A split loan means having two loans – variable and fixed – which could mean paying fees on two loans instead of one, depending on the lender you choose.

A borrower deciding to change loans or providers during the term could also face high breakage fees.

This means that it would not be suitable for a borrower who sells their home before the fixed rate ends.

Phoebe Blamey, director of Clover Financial Solutions, a mortgage broker, says she encourages her clients to hedge their bets against future rate hikes by dividing their fixed rate mortgages, typically 70% fixed and the rest variable. .

“This creates flexibility for any changes in the lifestyle of borrowers, such as a couple with children,” says Blamey.

For the first time in more than two years, the average of the lowest floating rates of the Big Four banks is now lower than the three-year average fixed rate for homeowners paying principal and interest, according to RateCity analysis, who monitors interest rates.

Sally Tindall, Research Director, says: “Over the past year, variable rates have been largely spared by the Big Four banks as they focused on reducing fixed rates. But with a record number of owners now fixed, banks have set their sights on a variable clientele. “

Tindall cautions that lenders have discretion over variable rates.

“Although the Reserve Bank of Australia has insisted that the liquidity rate will not increase next year, banks can always raise these variable rates to the lowest at any time,” she said. declared.

Mortgage brokers claim that many borrowers who ask for fixed rates also pay to lock in the offered fixed rate at the time of application or any time before settlement.

This means that they continue to qualify for the lower rate if there is an increase during the settlement of the property.

The cost of the locks, which typically last around 90 days, vary among lenders, but typically cost around $ 750. Some lenders, such as Tic: Toc, don’t charge borrowers.

A $ 500,000 borrower whose rate increases by about 20 basis points to 2.46% before an application is processed could pay about $ 3,000 more not to lock in the rate, according to the analysis by RateCity.

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