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Split Home Loans

Wondering if you should get a fixed home loan interest rate or variable? You can get both if you take out a split home loan.

Split home loans explained

Split home loans are an option that many borrowers aren’t aware of. They allow you to have the benefits of both a fixed and a variable interest rate.

How does a split home loan work?

A split home loan allows you to have both fixed and variable rates on different portions. You can usually choose the split proportions. For example, 80% fixed and 20% variable, 60/40, 50/50, etc. 

It’s important to understand that a home loan is a long-term financial commitment. Standard home loans terms in Australia are 25 or 30-year terms. Just because Australian interest rates are currently at record lows, there is no guarantee they will stay that way. Interest is the single biggest cost on any home loan.

The split loan concept is best explained by using an example. Suppose fixed interest rates are currently 4% and variable rates are 3.5%. You want to take out a home loan of $500,000. You are concerned about being able to make your repayments if interest rates rise.  You also don’t want to be completely locked into a fixed rate for your entire loan if rates fall further. You decide to put $250,000 of your loan at a 4% fixed rate for five years. The other $250,000 will be at the variable 3.5% rate.

What is the major benefit of a fixed rate on a split home loan?

  • More repayment certainty

If variable rates rise, your repayment on the fixed component of your home loan will stay the same. Only the repayments for the variable component will rise.

This can give you great peace of mind, especially if your circumstances are likely to change in the future. For example, if you plan to start a family and your partner will have reduced income for a period. Your repayments won’t rise by as much as it would have if you had a 100% variable rate loan.

On the other hand, there is a major potential drawback of a fixed interest rate on a split home loan.

  • You may get locked into higher repayments

This can happen if market rates fall. The fixed rate portion of your loan (and its repayment component) will stay the same. Only the repayments for the variable rate portion of your loan will fall. This means you will be making a higher overall repayment for your loan than if you had a 100% variable rate loan.

You may also be charged a fee if you want to get out of your fixed split loan portion early.

What are the benefits of a variable rate on a split loan?

  • You can make extra repayments on the variable portion

If you do, you’ll pay off your loan faster. You often cannot make additional repayments on the fixed split loan portion or on a 100% fixed rate loan. Split loans provide you with this flexibility.

  • Your repayments will fall if variable rates fall

This is because the variable rate repayment component of your loan will fall. Even a small fall in interest rates can make a big difference to your repayments. The table below shows the repayment difference for a 1% interest rate fall on a $250,000 variable split loan component.

Variable split loan over 25-year term Monthly repayments at 3.5% Monthly repayments at 2.5%
$250,000
$2,503
$2,243

You can use our calculator to work out your repayments for different split loan amounts at different interest rates.

On the flip side, the opposite could also happen.

  • Your repayments will rise if variable rates rise
 

The table below shows the repayment difference for a 1% interest rate increase on a $250,000 variable split loan component.

Variable split loan over 25-year term Monthly repayments at 3.5% Monthly repayments at 2.5%
$250,000
$2,503
$2,779

Should you split your home loan?

There is no definitive answer to this question. It depends on your individual financial situation, needs, goals and personality profile.

No one can accurately predict future interest rate movements over the long term. However, a split home loan minimises your risk of being exposed to interest rate rises. Split home loans can be a good option in the following circumstances.

  • You need a degree of repayment certainty.
  • You don’t want to be totally locked into a fixed rate if rates fall.
  • Longer-term interest rates are forecast to rise.
 

The benefits of a split home can offset some of the drawbacks of 100% fixed or 100% variable loans.

What else you need to know about split home loans

Still need more information to help you decide? Here are other FAQs we get here at Savvy.

Will a split loan help you to pay your home loan off faster?

This depends on future interest rate movements. If rates rise, you won’t be charged extra interest on the fixed component of your loan. This can help you to pay off your loan faster if you make extra repayments.

How long does the fixed rate last on split home loans?

This depends on the lender and the product. Fixed rates on split loans are usually available for terms of one to five years.

What happens at the end of the fixed rate term on a split home loan?

The loan usually reverts to a 100% variable rate loan. However, depending on the policy of the lender, you may be able to take out another split loan.

Can you get split loans for investment properties?

Yes, many lenders offer split home loans for investment properties.

Do split home loans have additional fees?

They may (or may not), depending on the policy of the lender. You should check and compare fees among different split loan products before making a decision.

What is the comparison rate on a split loan?

A comparison rate is the cost of interest plus lender fees and charges.

Can you get an offset account or redraw facility with split home loans?

This depends on the policy of the lender. However, many offer one or both of these optional features on their split loan products.

Do all lenders in Australia offer split loans?

No, however many do.