First home owner, after some practical advice re split loans

Hi everybody

I posted a little while ago regarding my property settlement. All went through smoothly and we moved in on the weekend - thank you to everyone who gave me advice. I really appreciate it!

Bit of background to our situation:
St George advantage package
Loan amount - $449,000
All variable @ 4.22% with 100% offset/30 yrs

Opened up a transaction account with St George and whilst collecting my card from their branch, their client service specialist sat me down to run through our home loan and offered a split loan.

Portion @ fixed rate of 3.89% for 3 years. The balance would be at the current variable rate.

She ran through some figures, e.g. if we fixed 400k @ 3.89%, i would save $79 per month in interest.
I am a first home owner; this is all very fresh to me and whilst I am enjoying learning all the ins and outs, it is still quite daunting making such huge decisions. So, through my naive eyes, this looks like a great deal? I am trying to see the potential disadvantages of doing this? Other than:-
- interest rates plummeting in the next years;
- having to sell the house in the next 3 yrs thus incur breaking costs (which is highly unlikely - we plan to be here for a while);
Can anyone point out any other disadvantages from moving to a split home loan?

The current loan repayments are $551 per wk. My partner and I had planned on paying $600 to try make a dent in the loan. If we took up the split loan offer, I understand that any additional repayments would go directly onto the variable portion, so we would still be making a dent in the loan as originally planned...

Would love to get some practical advice off you guys. Thanks in advance

 

Check whether there are any extra fees or charges.
Marg

 

You generally can't link up an offset or make unlimited extra repayments into a fixed loan.

Therefore it's important that you keep the variable portion large enough that you don't end up offsetting the entire loan (or paying down the entire variable portion) during the fixed period.

This is especially important if you're aiming to pay off the mortgage as quickly as possible. You don't want to find out later that you traded a slightly lower rate for the inability to pay off your loan as quickly as you'd like.

Cheers

Jamie

 

'Save' $79 per month. What absolute rot. If variable rates stay the same that might be what you save, but OO rates could go down. You could want to sell and upgrade etc etc

Don't make the decision about fixing based on the rate, or savings. Learn some more about it and then decide.

 

You lose flexibility in exchange for certainty.

Budgeting what you can afford to pay is a major reason people fix, plus the fear of rates rising/taking advantage of lower rates (currently). You can normally pay a set amount above the minimum repayments; I've seen $5k up to $30k for the length of the fixed term.

The downside to fixing is that you don't know where rates are going, hence your gamble could win or lose you money. If rates go down then you're still locked into the same rate. Don't let the lower rate be the only reason you fix but it can certainly be one of the reasons.

 

Thanks everyone for the comments - noted.
Rolf - Not doing any debt recycling.
Correct me if i'm wrong (im new to this!), my view on variable interest rates is... its great to run that gable IF you have enough cash in your offset account so that a possible interest rate rise wouldn't be too much of a concern (since your cash is offsetting the interest). In our situation, we don't have much cash (approx $5k) to sit in the offset account. Therefore considering OUR circumstances, are WE better off locking in a lower rate (via split loan, so that we can still make additional repayments on the variable portion) since we don't have much cash to offset a possible rate rise?

Jamie - thanks for your advice. I agree. We would need to do figures to ensure the variable portion is large enough so that we don't pay it out within the fixed term period as yes, our aim is to pay down the loan quickly.
Tom - Thanks. Certainly is a big a decision since we'd be locked in for 3 yrs!

 

Probably. If you think rates will rise then locking in may be good, but you would also want a variable portion for the offset. And remember your cash savings will hopefully be increasing.

 

If you have a fixed income, no possibility of pay rises, overtime, bonuses or fixed expenses, kids, car loans etc or if you are stretching affordability, borrowing the maximum, can't get to sleep, then look at fixing.

To work out the split, estimate what sort of extra repayment you might be able to make into the loan, times that by the fixed rate period, and then leave at least that amount variable.

Can pay $100pw extra? $5200pa, fix for 3 years, then leave a variable portion at least $15600.

It's not about the rate. Very few Aussie borrowers 'win' by fixing.