Split Loans

When it comes to paying interest on your home loan, picking the best way to configure your rate can be tricky. Ideally, it should be designed to suit your personal finances as well as your future life plans. Here we explain what a split loan is, how split loans work, as well as the pros and cons.

What is a split home loan?

A split rate home loan, otherwise known as a partially-fixed interest loan, allows borrowers to split their loan into portions and repay one part at a fixed rate and the remaining part at a variable rate. This can allow borrowers to reap the benefits of both a fixed and variable home loan by threading the two together.

It’s important to note that this split does not need to be an equal 50:50 divide. For one portion of the loan, the rate will remain stable and fixed, while the other portion can allow for more flexibility and freedom as the market fluctuates.

 

How does a split loan work?

 

Split loans combine elements of the two most common types of home loans, giving you the flexibility of a variable rate loan and the stability of a fixed rate loan. One part of your loan will remain fixed and unchanged by interest rate fluctuations, while the other part will be affected if interest rates rise or fall.

How you choose to split your loan is up to you and your unique situation. For example, you may choose to fix 25% of your loan and leave the remaining 75% at a variable rate. Or you may want to split it 50:50. Whatever your choice, you must ensure you are able to meet the minimum fixed rate repayments, as per your loan agreement.

What are the benefits of a split loan?

 

There are a number of benefits to choosing a split home loan including:

  • If rates go up, your repayments won’t change for the fixed portion of the loan

  • Ability to make extra repayments on the variable portion

  • Ability to connect an offset account or redraw facility to the variable portion

 

Are there any disadvantages to a split loan?

 

While it may seem like you’re getting the best of both worlds with a split home loan, there are some disadvantages:

  • Some lenders will restrict your ability to repay the loan early

  • The fixed portion can come with fees for extra payments

  • If you currently have a fixed rate home loan, it’s likely you will need to break out of your contract in order to split it, which can also incur a fee. 

  • If interest rates decrease, you’ll only experience the benefits from the variable portion of your loan. The fixed rate portion will remain unchanged.

 

What are the main differences between a split loan and a fixed and variable rate home loan?

 

With a fixed rate home loan, your repayments are locked in at a certain, unchangeable interest rate, usually for a period of 1-5 years. While this can offer welcome stability in a fluctuating market, it also means you won’t reap the benefits of interest rate drops, or be able to make extra repayments without fees, unless you refinance.

By comparison, variable rate home loans are much more flexible. Your monthly repayments will go down if the interest rate drops, but by the same token you’ll have to pay more if the interest rate rises. You also have the option of making additional and early repayments on your home loan without having to pay additional fees in order to do so.