What is a split home loan and how can it help?

Couple in kitchen.

When you sign up for a home loan, there are two types of interest rate you’ll be able to choose from — fixed and variable. But many banks and lenders nowadays will let you combine the two. This is known as splitting your loan.

A split loan gives you the best of both worlds: the repayment certainty of a fixed rate and the flexibility and features that typically come with a variable rate. Below, we explain how it works and why you might want to consider it.

How does splitting your loan work?

Splitting your home loan involves dividing it into two accounts, one with a fixed rate and one with a variable rate. The size of each portion will be up to you.

To illustrate how it works, let’s say you take out a $500,000 loan and, after speaking with your lender, agree to fix 60% of it. This means you’ll be charged a fixed rate on $300,000 and a variable rate on the remaining $200,000.

The interest rate on the fixed portion will remain the same for the duration of the term (usually between one and five years), regardless of any changes to the cash rate

Once the fixed term ends, you will be switched over to a standard variable rate.

The interest rate on the variable portion will fluctuate over time, either in response to moves by the Reserve Bank or out-of-cycle decisions by your lender. This could work out in your favour if rates go down, but your repayments might also increase if rates go up.

Advantages of splitting your loan

By splitting your loan, you’ll be able to make unlimited extra repayments on the variable portion, potentially allowing you to pay off your mortgage faster.

You might also be able to take advantage of other helpful features that are common among variable rate loans, such as an offset account and unlimited redraws on extra repayments. 

While many fixed rate loans offer these features nowadays, there are usually conditions attached, such as annual limits on extra repayments and fees on offset accounts.

The other big advantage of splitting your loan is it enables you to hedge against any interest rate increases. By fixing a portion of your loan, you can soften the blow in case your bank decides to hike rates.

Disadvantages of splitting your loan

While splitting your loan can help guard against interest rate hikes (at least partially), it also means you won’t fully benefit if rates decrease instead.

This is why it’s important to consider the current and future interest rate environment when deciding on a home loan type. 

Fixed rates tend to be a good indicator of where interest rates are heading. If they are higher than variable rates, it usually means lenders expect the cash rate to go up in the future. If they are lower than variable rates, the opposite is most likely true.

You should also think carefully about what you want out of your home loan. As always, it’s a good idea to discuss any questions you have with your bank or lender prior to making any decisions.

For information on interest rates and lending trends, head over to our home loan statistics page. And if you’re in the market for a home loan, visit our home loan comparison page, or browse the selection below.

Home loan comparisons on Mozo - rates updated daily

Search promoted home loans below or do a full Mozo database search. Advertiser disclosure.
  • placeholder
    Mozo Experts Choice 2021
    Smart Booster Home Loan

    2 Year Discounted Variable Rate, Owner Occupier, Principal & Interest, <80% LVR

    interest rate
    comparison rate
    Initial monthly repayment
    1.85% p.a.variable for 24 months and then 2.25% p.a. variable
    2.21% p.a.
    Go to site
    Details
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    Mozo Experts Choice 2021
    UHomeLoan

    Owner Occupier, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    1.85% p.a.
    fixed 3 years
    2.24% p.a.
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    Details
  • Hot DealFor a chance to win $100K towards your home loan, apply with Athena before Oct 31 & approved by Dec 15 (Please read the full T&C's)
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    Mozo Experts Choice 2021
    Celebrate Variable Home Loan

    <60% LVR, Owner Occupier, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    1.99% p.a. variable
    1.99% p.a.
    Go to site
    Details
  • placeholder
    Variable Home Loan

    Owner Occupier, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    1.99% p.a. variable
    1.99% p.a.
    Go to site
    Details
  • placeholder
    Basic Home Loan

    Fixed, Owner Occupier, Principal & Interest, LVR<70%

    interest rate
    comparison rate
    Initial monthly repayment
    2.09% p.a.
    fixed 3 years
    2.32% p.a.
    Go to site
    Details

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate, loan amount and term entered. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

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