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- A split home loan allows a borrower to divide their loan
- It is most often comprised of fixed-rate and variable-rate portions
- This can allow borrowers to 'hedge their bets' when it comes to interest rate movements while accessing features and benefits of both loan types
Trying to decide between the stability of a fixed interest rate and the potential savings of a variable rate home loan? Why not do both. Here's how.
What is a split home loan?
A split home loan is a flexible loan option that allows you to divide your loan into two portions, each with a different interest rate.
Typically, a split home loan consists of:
- a fixed-rate portion where the interest rate is locked for a set period of time (usually between one to five years), providing payment stability irrespective of market fluctuations
- a variable rate which is subject to interest rate fluctuations, largely driven by changes in the cash rate as determined by the Reserve Bank of Australia (RBA). This offers potential benefits during periods of interest rate decreases.
Why would you split a home loan?
A split loan offers a blend of predictability and adaptability, allowing you to benefit from fixed-rate security and variable-rate flexibility at the same time.
For some borrowers, it can offer 'a bet each way' on interest rate movements. If rates head higher, the fixed-rate portion of your loan will provide some buffer. If they go down, you will benefit via lower repayments on the variable-rate portion of your loan.
It's also worth noting you don’t need to split your loan into equal halves. Most lenders allow you to divide it in whatever way you’d like (e.g., 60:40 split, or even an 80:20 split).
How does a split home loan work?
To get a better understanding of how split home loans work, let’s consider an example.
Split loan: Case study
Sarah has a $500,000 home loan with a 30-year loan term and decides to split her loan 60:40.
She allocates $300,000 to a fixed rate portion at 3.00% p.a. for a five-year fixed period. The remaining $200,000 is assigned to a variable rate, which is currently 2.5%.
Sarah’s monthly repayments come to an approximate total of $2,055. This comprises:
Fixed repayment: $1,265
Variable repayment: $790
Let’s say that in 10 months' time, the market changes and the lender increases Sarah’s variable interest rate to 2.95%. Sarah’s monthly variable repayments would increase to $838, making her total monthly repayments $2,103.
If Sarah hadn’t fixed 60% of her loan, the rates increase would have translated into much higher repayments.
Savings.com.au's split loan calculator can help you find the right combination of fixed and variable interest rates to suit your needs.
Split home loan: pros and cons
Split mortgage benefits
- Security: The fixed component of your loan allows you to have some protections against interest rate rises.
- Flexibility: The variable component of your loan allows you to take advantage of any interest rate decreases as well as extra features not generally offered with fixed rate loan (more on these below).
- Competitive rates: You can secure a competitive rate with the fixed component of your loan and use the variable component for the flexibility it can offer.
- Unlimited repayment option: The variable component of your loan allows you to make unlimited extra repayments, allowing you to pay off the loan faster.
- Offset and redraw facilities: These can be more commonly offered on variable rate loans but only on some fixed-rate products and generally with restrictions. Offset and redraw facilities allow you to effectively reduce your loan amount, saving considerable interest over the life of your loan, while also allowing you access to any extra repayments should you need it.
- Increased savings: The fixed component of your loan can help you save in times of rising interest rates and/or allow you to pay increased interest payments on just the variable component of your loan.
Split mortgage disadvantages
- Missing out on falling interest rates: The fixed component of your loan locks you into an interest rate that may not reflect lower interest rates being offered on the wider market. This means you don’t get the full benefit of interest rate drops.
- Getting hit by higher repayments: On the flip side, you will need to commit more money to repayments for the variable component of your loan as interest rates rise.
- Break fees: If you wish to change the fixed component of your loan for any reason, you may be subject to fees or penalties. These will generally apply even if you wish to roll the fixed component of your loan into the variable component with the same lender. Fees also usually apply if you have a windfall and wish to pay your loan out.
- Fee double up: Depending on your lender, you may be hit twice with establishment and ongoing fees, charged on both the fixed and variable components of your loan.
Savings two cents
Split rate home loans can provide a solution for borrowers looking to hedge their bets with interest rate movements.
The fixed-rate portion of a split loan can insulate borrowers from full exposure to rate hikes while the variable rate portion offers opportunities for cost savings if interest rates fall.
As well, the variable rate part of the loan still affords borrowers the ability to make unlimited extra payments, something that's typically tightly capped or even penalised under fixed-rate loan conditions.
Not all home loan products offer a split loan option but many do. If you're thinking about splitting your home loan, be sure you have clear goals in mind, do your research, and make sure the split portions are the most suitable for your situation.
When should you use a split home loan?
A split home loan could be an ideal choice if you're apprehensive about potential interest rate hikes.
If you believe an interest rate upcycle is imminent, you can partially protect yourself by fixing a portion of your loan, safeguarding you against rising interest rates during that term.
See also: Should you fix your home loan interest rate?
At the same time, the variable-rate portion still maintains its benefits, such as coming with an offset account to reduce overall interest.
This dual-structured loan offers the advantages of both fixed and variable rates, providing a blend of predictability in repayments and adaptability to market changes.
Keep in mind
A split loan is usually a feature within a home loan package, very rarely a product within itself. This means you can ask lenders what they can offer in terms of splitting your loan but be warned, it can come with extra paperwork and extra fees.
Other split loan considerations
Here are a few other things to consider when searching for a suitable split home loan:
Feature benefits vs. costs: Evaluate whether the additional features of the loan package justify the costs associated with splitting your loan.
Setup fees: Seek lenders who offer low or no setup fees for each loan split.
Repayment flexibility: Be clear on what the fees or penalties are for making extra payments on the fixed component of the loan and enquire as to whether you can avoid additional repayment fees for both components of your loan.
Customisation options: Investigate the degree of customisation available for splitting your loan (e.g., the proportions of fixed vs variable) and term lengths for the fixed rate. There is no general rule when it comes to the make-up of your loan. You should be able to split it however you want - 50:50, 60:40, or 80:20 - whichever best suits your purposes. This is where our split loan calculator is useful in weighing up the combinations. Some lenders will even allow you to split your loan up to four ways, providing plenty of flexibility to customise your loan structure.
Ability to choose split term: As with other fixed-rate terms, you should be able to choose the period of time your rate will be fixed and your loan will be split. You also need to be clear on fees should you choose to re-fix a component of your loan after the initial fixed rate period expires.
Refinancing a split loan: It is possible to refinance a split home loan although the process can depend on the terms and conditions of your original split loan and the policies of any new lender you are considering. Refinancing will likely involve similar steps to refinancing a standard variable or fixed loan but can be more involved given you effectively have two loans. Refinancing should give you the opportunity to adjust your split components or consider whether it may be best to consolidate into one loan.
Finding a home loan with a low rate
Below is a list of home loans with some of the most competitive rates on the market and can be a good place to start
Lender Home Loan Interest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees Max LVR Lump Sum Repayment Extra Repayments Split Loan Option Tags Features Link Compare Promoted Product Disclosure
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How to apply for a split home loan?
If you are an existing borrower
Depending on your lender, it may be as simple as doing this via your lender's online app or contacting them to clarify the process for splitting your current loan. You will need to have done your research on how you want to split it, including portion allocations and fixed-rate term.
If your lender does not offer the ability to split the loan you have, you can discuss other options with them and make sure you enquire about fees. If the costs, terms, and conditions don't align with your aims, it may be worth considering refinancing with another lender that can offer what you're seeking.
If you are a new applicant
Clarify with your lender up front that you are seeking a split loan and go through the usual home loan application process. Be sure to enquire about any additional fees or costs associated with setting up a split loan structure and compare them with the charges of other potential lenders to ensure you are getting a competitive deal.
What happens at the end of a split loan fixed term?
When any fixed-rate home loan term expires, the rate will automatically roll over to the lender's standard variable rate or 'revert rate'. Typically, this rate will be considerably higher than you'll be paying on the variable portion of your loan. This is because standard variable rates are a default 'reference rate', used to manage risk and encourage refinancing.
It pays to be on the front foot before the fixed-interest portion of your split loan expires so you can be sure you get the best outcome for your circumstances. You can generally choose between:
- Fixing the fixed-rate portion of your loan again: You will need to negotiate with your lender the rate you'll be able to lock in at. It will generally not be the same as your previous rate as market rates will likely have moved during the fixed-rate period.
- Creating a new split loan: This entails blending your remaining loan balance into a new combination of fixed and variable rates which may better align with interest rate expectations or your changed financial goals.
- Combining the fixed-rate portion to your variable rate: As we've established, this won't happen automatically as the standard variable rate will be your lender's default. You will need to negotiate rolling the fixed-rate balance into the variable rate balance you are paying. It's best to do this before your fixed-rate period ends so you can, hopefully, avoid the shock of your lender's revert rate.
- Refinance your entire loan: This can be an opportune time to get a better deal with your current lender or an entirely different lender. Again, it pays to have done your market research well before your fixed-rate period expires so you are ready to switch when your fixed-rate period ends.
Yes, you can split your home loan between two different lenders although not all lenders will agree to this arrangement. Some borrowers may seek to split their home loan between different lenders to take advantage of a particular product, promotional deal, or offer from one lender that another lender does not offer. This can also be an arrangement when the borrower takes out a 'second mortgage', usually using the equity in their property as security for the second loan. Be aware that many banks require what's called 'first registered mortgage' on a property title, meaning that lender will get the highest legal claim on the property should there be a mortgage default. This means they will be the first lender to be fully repaid from the proceeds of any sale before other creditors receive any leftover funds. Split loan arrangements with two lenders can be achieved with some cooperation between them, generally with one taking a subordinate position. Be warned, however, this can see the second lender charging a higher interest rate or enforcing stricter lending criteria as the second, 'subordinate' loan will be regarded as higher risk. As with most financial matters, there is no one 'right' answer. It will entirely depend on your financial circumstances, what best suits your goals and needs, and market conditions at the time. Many borrowers with a split loan may opt for a 50-50 split. This can provide the 'best of both worlds'. Borrowers seeking security against anticipated interest rate increases may be compelled to go for a 70:30 split, fixing 70% of their loan to shield them against rate hikes but leaving a 30% variable rate component. This allows them to still make significant extra payments that are generally not permitted under fixed-rate conditions. Those who want to err on the side of flexibility might opt for an 80:20 split, keeping 80% of their loan balance on a variable rate in anticipation of interest rate decreases while also having the security of a fixed rate portion. If in doubt, it can pay to seek professional advice and do your own research on where experts think interest rates may be heading. Bear in mind though that even experts can find it difficult to predict interest rate movements which can be affected by many factors. Splitting a home loan is generally not too expensive, particularly if you're splitting an existing loan with the same lender. Many lenders don't consider this a refinance so there's generally no need for application or settlement fees, etc. Some lenders may not charge a fee at all; others may charge up to $300. Be aware that splitting your loan will effectively create two separate loan accounts so you may be up for two lots of ongoing or monthly service fees. It's wise to check with your lender first to try to negotiate waived fees for a second linked loan account. If you have an existing loan where splitting is not permitted, you will likely be up for switching to another loan product that will allow it. This may entail separate establishment fees, etc. Again, negotiate with your lender or look to refinance with another lender that may give you a better deal on switching to the loan structure you're looking for. There are a few factors to take into account when comparing split home loan options. Arguably, the most basic of these is the comparison rates for both portions of the split loan. Check to see whether they are close to the interest rates you've been offered as well as other comparison rates available on the market. Check also whether the split proportions you're after are permitted by the lender. Some may impose minimum or maximum proportions that may not align with your preference. Of course, it's also important to ensure you're getting (or keeping) the features you're after and the fees to split your loan are comparable to what other lenders are charging. Be sure to ask about break fees on any fixed-rate portion of your loan so you are aware of what you may be up for if you wish to restructure your loan before the fixed-rate period is up. Frequently Asked Questions