Split Loan - what ratio?

Hi guys. Looking for some advice.

I am going to split my loan. Fix most of it for 4 years and keep rest in variable.

• Loan Amount 590K

• Current offset amount 35K

• Looking to make 10K-12K extra repayments yearly.

I treat the offset fund as an emergency fund to be used for Murphy's Law type situations. I have been putting the 10K-12K extra repayments yearly into the offset.

I want to fix for 4 years. 1.99% fixed and 2.78% variable. Fixed loan has a limit of 10K extra repayments yearly.

I understand to get the full benefits of the offset amount, the variable amount needs to be higher than 35K. Since I am going to have to stay with my current bank for 4 years which means, 40K extra repayments into the offset, that means it would be best to keep the variable amount to 75K?

I am having a hard time deciding how much of the loan should be variable?

Or to keep things simple, should I fix the whole loan given the fixed rate is much lower than variable?

Also, the 10K extra repayments, would it be more beneficial to put it directly into the variable loan? Or it does not make any difference if I put it into the offset?

I have no intention to turn my property into an investment property. So the tax benefits of an offset account does not apply to me.

Would appreciate any advice.

Thanks.

 

I encountered a new client the other day who fixed the majority of their loan and now their savings exceed their small variable portion on their main residence loan so they will have no choice but to offset investment loans instead which will cause them to pay more tax.
They were also unable to debt recycle as well which could also cause them to pay more tax.

 

Can you ask your lending manager at your bank and see what they recommend?

 

Nobody knows your situation, goals and objectives better than you so take my commentary with a grain of salt...

But logically, if I were in your position and you're putting away $12K pa of additional repayments that you want to reliably access ongoing then the absolute minimum you'd want is 4 x $12k = $48K + $35K current funds (= $83K) for the variable split.

You could do it into the fixed loan too and make the variable loan smaller, but there have been instances where in the past redraw has been swept out by the lender so you'd need work out if you're comfortable with that strategy if they go down that path (may also answer your question on paying down the variable loan vs. funds in offset).

4 years is also a very long time so you'd want to make sure you've considered all likely scenarios to make sure the split is relevant (and also unlikely scenarios, given what has happened over the last 12-14 months!)

Lastly if you're committed to 4 years I'd make sure it is the best deal you can get for that period (fixed split competitive, variable less so).

 

As a rule of thumb only, what i normally reccomend is.

- How much money you have in savings that you know you're not going to touch during the fixed term.

- how much you can save up on a money basis.
- x that by the fixed period

Then that would be your variable portion.