When you take out your home loan, you’ll have to choose what sort of interest rate will apply to your deal. Most people think that fixed and variable interest are the only two options, but there’s actually a third choice that combines the two: split home loans. By fixing only part of your home loan, you can reap the rewards of both fixed and variable interest rates at the same time.
How do split home loans work?
As mentioned, split home loans involve one part of your mortgage being fixed and the remainder being left variable. This can be any ratio you like, whether that’s 50/50, 60/40 or 70/30. The fixed portion will have its own rate, which is locked in for a set period, usually between one and five years, while the variable portion will fluctuate with market movement.
This means you’re making two payments on two loans, instead of a single payment on one. You can work with your lender to arrange these payments to be made on the same day to maximise convenience for you. At the end of your fixed rate term, your home loan reverts to being entirely variable unless you agree to a new split term or fix it entirely.
Case study: splitting your home loan
Peter is taking out a $400,000, 30-year home loan and decides to split it 60% variable, 40% fixed for three years. This provides him with a certain amount of stability in his repayments while allowing him to use his mortgage offset account and make additional payments towards the variable portion.
Peter is offered a fixed rate of 5.70% p.a. and a variable rate of 5.45% p.a. This means he’ll be paying $428 per fortnight towards the fixed portion and $625 towards the variable portion, adding up to a total of $1,054 per fortnight. He can then start paying down the variable portion aggressively and offsetting this amount with his savings.
Why a split home loan can work for you in 2025
"After the RBA kept the cash rate at its highest level in a decade, we’re now seeing rates start to ease in 2025. That creates opportunities to refinance or increase your borrowing power. However, with forecasts still uncertain, even top economists can’t say where rates will go next. A split loan can give you some certainty on your repayments, which can be especially helpful if you have big life events on the horizon like starting a family or planning a wedding."
The pros and cons of split home loans
Pros
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Customisable to suit your situation
Part of the beauty of split home loans is that you can adjust the split to whatever you’re looking for. It doesn’t need to be 50/50 by default.
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Allows repayment flexibility for variable portion
Just because part of the loan is fixed doesn’t mean you lose the full benefit of variable rate flexibility. You can still make use of offset accounts and early repayments.
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Offers a level of stability with fixed portion
With part of your home loan payment fixed, you’re afforded a level of consistency in what you’re paying each month.
Cons
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Not always the best of both worlds
Combining fixed and variable rates means you probably aren’t getting the full benefit of either. You can’t offset the full loan, nor will all of it be protected against rate changes.
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Break fees if you wish to end it early
If you decide to end your split loan term early, you’ll have to pay potentially costly exit fees on the fixed portion of the loan.
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More complicated structure
The fact is that fixing your whole loan or leaving it entirely variable is simpler than splitting it into two and managing both facilities.
Is a split home loan right for me?
Whether splitting your home loan is the best option depends on your needs and preferences as a borrower. It’s undoubtedly better suited to some people than others, as everyone is different. There are two clear scenarios where a split loan may be suitable:
- You want repayment certainty for a large portion of your loan, but still want to get value out of your offset account and extra instalments.
- You want to strike a balance between protecting against rate rises and taking advantage of rate drops.
It’s worth reviewing your options carefully and considering what you want to get out of your loan before you sign up for a split or fixed term.
