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

When you compare home loans, there are two types of interest rates you can choose from – fixed rate and variable rate. However, you don’t have to choose just one or the other. Many banks and lenders will let you combine the two in what’s known as a split rate home loan.

A split home loan is separated into two different portions – one part fixed rate and another part variable rate. For some borrowers, this method 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.

Here, we’ll explain how it works and why you might want to consider it.

A split home loan involves dividing your home loan into two accounts, one with a fixed rate and one with a variable rate. The size of each portion is up to you, so you can choose to split your home loan 50:50, 60:40, 70:30 and so on.

Let’s look at an example – say you take out a $500,000 loan and, after speaking with your lender, you decide you’re going to split it 60:40. You agree that 60% of it will be on a fixed rate and 40% will be on a variable rate. 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.

As with standard variable rate home loans, 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.

The advantage of a split home loan is that you’ll essentially be able to hedge your bets. The fixed rate portion won’t be impacted by home loan interest rate rises, while the variable rate portion of your home loan will benefit if rates are cut.

The variable rate part of your home loan should also allow you to make unlimited extra repayments, potentially allowing you to pay off your mortgage faster and even save money on interest.

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 home loans now offer these features, there are usually conditions attached such as annual limits on extra repayments and fees on offset accounts. By having part of your home on a variable rate, you’ll still get to benefit from these perks.

A split home loan can help guard you against interest rate hikes to an extent, but 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.

Generally speaking, 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 more likely true.

No, you can split a home loan however you prefer, whether that’s split evenly between a fixed and variable rate or a different configuration. For example, you might decide to fix 70% of the loan while leaving the remaining 30% variable.

Before making a decision, think carefully about what you want out of your home loan and how that might be achieved by splitting it into fixed and variable rate accounts.

For example, if interest rates look set to increase and you don’t think you’ll have much need for the variable rate features, it might be worth fixing 100% of your loan.

On the other hand, if you’re not too concerned about interest rates going up, or there’s suggestions that interest rates might be cut in the coming months, then a purely variable rate home loan might be the more suitable option. You could also benefit from more variable rate features that could help you save on interest.

All told, a split home loan can be a good option in a tricky economy which has a looming uncertainty around interest rate movements.

As always, it’s a good idea to discuss any questions you have with your bank or lender prior to making any decisions, and if you still have concerns, consider seeking out advice from a professional financial planner.

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