A home loan usually has either a fixed rate or a variable rate. But a split home loan allows you to have a bit of both. Here's how a loan split works: Say you borrow $500,000, you can lock 40% of it ($200,000) at a low fixed rate for 3 years and the remaining 60% ($300,000) is on a variable rate. If rates rise, 40% of your loan is fixed. If rates fall, 60% of your loan should benefit from lower rates.
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What is a split rate home loan?
A home loan split means dividing portions of your home loan principal (the money you have borrowed) into different home loan accounts with different interest rate types. You could split your loan 50/50 between a fixed rate and a variable rate, or you could split it 80/20 and so on. Some lenders allow you to split multiple times.
Split rate home loans allow you to enjoy some benefits of both fixed and variable rates. If your lender cuts rates, your variable portion will drop. But if rates rise, the fixed portion of your mortgage split will still be at the lower rate (because fixed rates don't change).
Example: Catherine goes for a split loan
Catherine is discussing her split loan options with her lender. She needs to borrow $300,000 and wants both repayment certainty but the ability to make additional repayments and put funds into a 100% offset account.
Catherine decides to split her loan 50/50, putting $150,000 into a 3-year fixed rate account and $150,000 into a variable rate that has an offset account. She also puts $50,000 of her savings into the offset account, reducing her variable loan principal to $100,000.
* This is a fictional, but realistic, example.
Fixed versus variable rates: What's the difference?
Split loan calculator
You can use our split loan calculator to estimate the costs and benefits of splitting your rate. Put your full loan amount in the second field, and specify the fixed portion in the "fixed portion of loan" field. Note that this calculator doesn't allow you to estimate more than 2 splits.
If you don't have the exact numbers, use the closest estimates you can come up with.
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How do I split my home loan?
The process for splitting a loan is relatively simple, although you can do very complicated splits with the aid of a split calculator or a broker.
- Find a loan with a split facility. Not all mortgages have the option to split your loan. Check if yours does and if it doesn't, ask your lender if they can make an exception or consider refinancing to a loan that allows splits.
- Decide your split portions. You can split any way you like depending on how you wish to structure your loan. You could split 50/50 or into more than 2 portions (most lenders allow up to 6 splits).
- Make repayments. Once your loan is split you make repayments into each portion as normal. If your variable portion allows for extra repayments you could pay off extra in order to pay off your loan faster.
- Monitor your rates. The fixed rate portion won't change during the fixed period. But your variable portion can change at any time, so be sure to monitor the rate. If it gets too high you might want to refinance. Just keep in mind that there are breaking costs associated with ending a fixed rate, which could be costly.
Why should I split my rate?
- Certainty and flexibility. A split rate loan can give you the certainty that a portion of your loan won't be impacted should interest rates rise, but the flexibility to benefit from any rate reductions and some of the features commonly offered on variable rate loans.
- Repayment certainty. A fixed rate locks in a rate for an agreed period of time. During this fixed term, your rate, and therefore your repayments, won't change at all. This can give borrowers who are trying to keep to a strict budget more security, and can minimise the impact of rate increases.
- Offset accounts and extra repayments. If the variable portion of your loan allows for extra repayments or has an offset account you can use extra cash to reduce your home loan debt faster.
- More options. A split facility gives you more options with your mortgage, allowing you to fine tune your splits for maximum effect.
How can a broker help?
A good mortgage broker can help you design a mortgage split that works for you. This can be very helpful because calculating these splits and understanding the benefits can be confusing for the average borrower. A broker's service is usually free because they receive a commission from the lender, not the borrower.