Home loans 101: Split rate home loans explained

Find out how splitting your loan could help you make the most of a fixed and variable interest rate

Home loans are a major financial commitment, so it’s important to find a mortgage repayment structure that really caters to your needs and financial circumstances.

While a traditional variable or fixed rate mortgage might be suitable for some borrowers, those looking for optimal flexibility and customisation might prefer a split rate home loan.

In this article, we’ll explain what a split rate home loan is, how it works, the pros and cons, and the other things to consider when splitting your home loan.

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What is a split rate home loan?

When you have a split rate home loan, one portion of your loan is charged interest at a variable rate, while the other portion is charged interest at a fixed rate.

This way, borrowers get to enjoy the benefits of both a fixed and variable rate home loan. You don’t need to split your loan into equal halves, you can choose a different ratio (e.g. 40% fixed, 60% variable).

The fixed portion of your loan guarantees more stability, while the variable portion allows for increased flexibility.

How does a split home loan work?

To get a better understanding of split rate loans, let’s take a look at an example.

Say you have an $800,000 home loan with a 30 year loan term and decide to split your loan 50:50. You fix $400,000 at 2.80% per year for a 2 year fixed period and put the remaining $400,000 at a variable rate of 2.50%.

Your monthly repayments would come to an approximate total of $3,224. This combines:

Fixed repayment: $1,644 per month
Variable repayment: $1,580 per month

Now say that in 10 months time, the market changes and your lender increases your variable interest rate to 2.90%. Your monthly variable repayments would increase to $1,665, making your total monthly repayments $3,309.

While no one likes to see their home loan repayments increase, the increase would have been even larger had 50% of the home loan not been fixed.

Your fixed repayments remain the same over the duration of the fixed term, providing a constant that you can budget for.

On the other hand, if interest rates drop, it’s only the variable portion of the split loan that will see decreased repayments.

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What are the benefits to splitting a home loan?

A split rate home loan can be a good option for the indecisive borrower who wants to make the most of what variable and fixed rate loans offer. Here are some of the benefits to splitting your home loan:

Extra repayments option: you can make unlimited additional repayments on the variable portion of the loan. This allows you to pay off your loan faster and save on interest in the long run
Sense of stability: if rates increase, the fixed interest part of your loan won’t be affected and your repayments will remain the same for this portion
Access to loan features: while many lenders restrict the usage of loan features like offset accounts and redraw facilities on fixed rate home loans, this isn’t a problem when part of your loan has a variable interest rate
Benefit from interest rate drops: should interest rates fall, you can benefit from this thanks to your variable loan portion
Flexibility on how you split the loan: whether you want to split your loan 50:50 or 80:20, most lenders allow you to split your loan at whatever ratio you would like
Investors can split: there are split loan features available for investment home loans.

What are the drawbacks of splitting a home loan?

Despite the many advantages of a split loan, there are some drawbacks to be aware of:

Your repayments could vary month-to-month: since part of your loan is variable, you can expect interest rate fluctuations to impact your repayment amount. This can make budgeting difficult
Increasing interest rates: if interest rates increase, your repayments are likely to rise as well due to part of your loan being charged interest at a variable rate
Fees: there is a possibility you may face additional fees charged to both sides of the loan, as well as fees associated with features like offset accounts and redraw facilities
Not fully benefiting from rate drops: if interest rates drop, you’ll be stuck paying your usual amount for your fixed rate portion
Break fees: break costs may be charged on the fixed rate portion of your loan if you refinance or repay the loan early.

How much should I split my home loan?

It depends on your needs and preferences. Many borrowers like to split the loan 50:50, but you can split it in a different way.

For example, if you prefer the security of a fixed rate home loan but want to make full use of an offset account, you might prefer to split your loan into something like 80% fixed and 20% variable.

It’s a good idea to speak to a financial advisor or mortgage broker before splitting your home loan to decide if it’s a smart move for you.

Can you refinance a split loan?

Yes, it is possible to refinance a split loan, though the process might vary depending on the specific terms and conditions of your existing split loan and the policies of the new lender you're considering.

Refinancing a split loan involves many similar steps to refinancing a variable or fixed loan, but there can be some additional considerations due to the split nature of the loan.

Refinancing a split loan gives you the opportunity to adjust the split ratios between fixed and variable portions. You can also consider if you want to keep this split structure or consolidate into a single loan.

Because of the split structure, there might be additional complexity in terms of paperwork and negotiations when refinancing a split loan compared to a single fixed or variable loan.

An FND Broker can walk you through the process and tell you more about your home loan options. Book an appointment today to find out more.