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.
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.
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.
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.
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.
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.
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 |
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.
The benefits of a split home can offset some of the drawbacks of 100% fixed or 100% variable loans.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
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© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
