Aaron Bell
Athena Cocoves
A split home loan divides your home loan into two parts — one with a fixed rate and another with a variable rate. This type of home loan is available for owner-occupiers and investors or during refinancing.
How does a split home loan work?
Borrowers typically choose to pay the principal and interest associated with their mortgage in one of two ways:
- Through a variable-rate home loan, where the interest rate fluctuates with the RBA cash rate.
- Through a fixed-rate loan, where the rate stays the same for a set period (usually between one and five years).
A split home loan represents a compromise of the two. Instead of choosing one or the other, a split home loan divides your home loan into two parts: one variable and another that’s fixed. So, while you technically have one home loan, you’ll have two repayment methods.
Split home loans are available for owner-occupiers and investors or available during refinancing. If you take one on, you can generally choose which portion of your mortgage you want to go where and how evenly you want the two parts split. You could, for example, repay 60% at a fixed rate and 40% at a variable rate.
The ratio you choose will depend on your financial situation and your goals for paying back your mortgage. If your priority is certainty, fixing a larger portion may be a better option. If you are looking for some security but expect interest rates to drop, having a larger portion with a variable rate may make sense.
🤓 Nerdy Tip
Lenders offer different split home loan products, and choosing the right one for you is about more than just getting the lowest interest rates. Mortgage features and the charges they can accrue may turn out to be just as important.
» MORE: How to refinance your mortgage
Should you split your home loan?
Splitting your home loan has pros and cons, depending on your financial situation and borrowing objectives.
Pros
- Splitting your home loan provides more security than a variable-rate home loan while still allowing you to capitalise on interest rate falls.
- The fixed-rate portion of your loan will give you security, as your repayments won’t change on this portion.
- The variable rate portion can give your loan flexibility to make extra repayments and utilise features like redraw and offset accounts.
- You can choose the portion of your loan you wish to split. If you’re risk averse, you could select a 75:25 fixed-to-variable split. On the flip side, you could choose an 80:20 variable-to-fixed split if you are okay with riding the ups and downs of the market.
Cons
- Budgeting for two different repayments can be tricky as one can always change.
- If you don’t time the market correctly, you can always end up paying more in interest. If interest rates drop, you are stuck paying more in your fixed account than if you had chosen a variable home loan.
- Splitting your home loan can also result in added fees, as your lender is essentially managing two accounts. Always check to see the fees and charges before choosing a home loan.
» MORE: Understanding your mortgage amortisation schedule
How to split your home loan
If you are looking to split your home loan, researching lenders online can give you a starting point to compare. Split loans are typically not as common as solely fixed or variable-rate loans, so you may not have as many choices in the marketplace. You can also chat to lending specialists at a bank or a mortgage broker to help you compare.
Key considerations
If you think splitting your home loan is worth considering, speaking to a professional before committing would be valuable. A few key things to consider are:
- How much are you borrowing? The bigger the loan, the more repayments will be, meaning small changes to your variable interest rate can lead to higher mortgage repayments.
- How much to split on each side? Depending on your goals, you need to consider how to split your loan. If you want security and regularity in your repayments, you might want an 80:20 split favouring the fixed rate. Or, if you anticipate that interest rates will drop, you might want an 80:20 variable split.
- How long will you lock in a fixed rate? Most fixed rate periods are between one and five years. So, you need to decide how long you want to lock in the fixed rate portion.
- What features will you need? If you want the flexibility of extra repayments, features, like offset accounts and redraw facilities, can come with accompanying fees.
- Your changing financial situation. Changes to your income or career are always essential considerations when taking on a home loan.
Taking on a home loan represents a huge financial commitment, so be sure to do your research before choosing. Additionally, if you are looking to refinance to a split loan, make sure you are aware of any break or refinance fees from your lender before switching.
» MORE: 10 questions to ask your mortgage broker
About the Author
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