Some of you know I’m a numbers guy – I like to crunch the numbers to see how will a proposed strategy will actual benefit/save for our clients. At the end of the day, financial benefit is a tangible & important measurement especially now that brokers are bound by Best Interest Duty (BID).
As such I’ve been a big advocate of using a split loan strategy – in particular when it comes to paying down your non tax-deductible debt such as home loan! But keeping in mind the split loan strategy is not for everyone. It benefits the most to those who have a good money management & savings habit but may not be as good for those spenders in nature. Which is why I thought it’s worthwhile to do some number crunching to see how it’ll really benefit you as a borrower from financial perspective.
Working out the numbers with split loan
Let’s go through a very simple scenario. Joe is on $100K income per year and he has just settled his first home in Sydney with a mortgage of $600K.
Let’s assume he keeps everything on variable with a major bank and gets a variable rate of 2.7% then his monthly repayment will be $600K @ 2.7% – $2433.59/mth.
Now let’s assume he follows my advice and decide to do a split loan structure instead. He would like to keep a portion variable @ 2.7% with 100% offset while keeping the remaining portion on fixed for 2 years @ 2.09%. Let’s see how the numbers pan out:
- Variable component – $100K @ 2.7% = $405.60/mth
- Fixed component – $500K @ 2.09% = $1870.68/mth
- Total monthly repayment = $2276.28/mth
So the difference in repayment per month here is $2433.59 – $2276.28 = $157.31/mth or $1887.72 per year. This is the potential saving you can have or you can simply just pay these extra savings into the loan and pay it down even faster!
It may take you a few hours to work out what the variable component should be and how much to fix, however that hours of work could translate to couple thousand of savings per year so personally I think it’s worth doing.
If you have trouble working out how much to keep variable and how much fixed – check out this prior video which I explained in detail on how to work out each loan component:
Other alternatives – fixed rate with 100% offset accounts
The alternative to split loan is to go with a lender who provides a fixed rate product with 100% offset facility. Most consumers are probably not aware of this, however there are some lenders like Adelaide Bank or Auswide Bank who offers this very niche type of product.
Imagine if someone has trouble working out how much they anticipate to save in the next few years then the fixed rate product with 100% offset could be a very good option where you get to enjoy low fixed rates in the current environment while having 100% offset facility – that means your savings can REALLY work hard for you!
So using Joe’s example above – assuming that the lender is offering 2.09% fixed for 2 years with 100% offset then your monthly repayment becomes $600K @ 2.09% = $2244.82/mth. Just from repayment perspective it’s $188 cheaper per month than if you keep all loans in variable. In addition depending on how much you keep in offset account your interest will also reduce! It’s a truly powerful tool for debt reduction, especially for first home buyers.
However like all fixed rate products there would be limitations such as how much additional you can pay into the loan per year. And for some reason if you decide to break the fixed period during fixed rate period then chances are break fee will apply. So again, while this option could save you heaps it may not be for everyone – you would want to assess your personal circumstnces and ensure the product aligns to your goals before taking up this option.
If you have any questions about any of the above or like to discuss which option would suit you better, feel free to reach out to us for a personalised discussion via the contact us page.