What is a split rate home loan?
A split rate home loan allows you to split your loan into two pieces: one with a fixed interest rate and the other with a variable rate. It’s an option potentially worth considering if you want a level of certainty over your repayments and budget – via the fixed portion – and some of the flexibility and features typically offered by a variable rate loan.
Most lenders will offer you the ability to split your loan, but it can be worth checking whether a particular loan you’re considering can have a split arrangement.
How does a split rate home loan work?
Split rate home loans generally work similarly to solely fixed or variable rate loans when it comes to how they’re assessed by the lender and, if approved, how they operate day-to-day.
However, when you make your application you would need to outline:
- That you would like to split your loan’s rate
- How much of the loan you want to fix and how much to make variable
You’ll typically make separate regular repayments on each portion of the loan, but may be able to arrange for these repayments to be made on the same day to help make budgeting more manageable.
If your loan’s rate is split, you usually have access to some or all of the features of each of the loan types, such as the ability to make additional repayments on the variable rate portion.
How do you decide on the split?
Some factors you may want to consider when deciding your home loan split (how much of your mortgage debt to have on a fixed rate and how much on a variable rate) are:
- Interest rates: If the fixed rate is lower than the variable one, or if you expect rates to rise in the near future, you may dedicate more of the loan balance to the fixed rate to save on interest, or vice versa.
- Your needs: If you want more budgetary certainty, you might decide to fix more of the loan to reduce the impact of possible interest rate rises. Of course, if rates are likely to drop in the near future, you might choose to have a larger portion of your loan balance on a variable rate.
- Offsetting interest: If the variable portion of your loan comes with an offset account, you may want to consider how much money you’ll have in this account when deciding how much of your loan to have on a variable rate.
What happens at the end of a split rate fixed term?
At the end of the fixed term, the fixed portion of the loan will revert to a variable rate (which may be higher than your current variable rate), unless you lock in a new fixed rate or make another arrangement with your lender. Check your lender’s policy to ensure you know what happens at the end of your fixed term.
At this point, you might reassess if you want to re-split your home loan rate, or adjust how much incurs a fixed rate and how much a variable rate. It can also be a good opportunity to compare home loan interest rates from other lenders and, if you find a better deal, think about refinancing.
What’s the difference between fixed, variable, and split rate home loans?
The main differences between fixed, variable, and split rate home loans are how interest is charged and which features are available.
Fixed rate home loan
With a fixed rate loan, your interest rate and regular repayments are set at the start of your loan agreement and won’t change until the fixed term ends – unless you choose to end it prematurely (the lender usually charges a fee if you do this). Fixed rate loans typically come with fewer features than variable rate ones, and there are usually restrictions on making additional repayments.
Variable rate home loan
The interest rate on a variable rate home loan can change at any time, meaning your regular repayment amount could go up or down. You may have access to additional features that some fixed loans don’t offer, like the ability to make unlimited extra repayments without incurring fees, use of a redraw facility to withdraw extra repayments you’ve made, or an attached offset account which can reduce the amount of interest you’re charged.
Split rate home loan
A split home loan offers a combination of a fixed and variable rate. Your repayments on the fixed portion will not change, but they could on the variable part. If rates do go up, you’ll be less exposed to the increase, as only part of your loan is on a variable rate. On the other hand, if rates go down, you’ll only get part of the benefit, as a portion of your loan incurs a fixed rate. You may also be able to access features that are common on a variable rate loan, while enjoying the certainty that comes with a fixed rate.
What are the pros and cons of split rate home loans?
Pros
- You can generally decide what portion of the loan to fix and how much to have at a variable rate, so it can be set up to suit your preferences and financial needs.
- Having a fixed rate means you can be confident that even if interest rates change, the repayments on that portion of the loan will stay the same.
- You may still have access to features that come with variable rate home loans, like an offset account, which could help you save on interest.
Cons
- Not all home loan products can be split, so you might have a smaller selection of products to compare from.
- Since you’ll essentially have two separate loans, your repayments might not line up perfectly with each other and there’s more to consider when making your application.
- If you chose to switch loans or providers during the fixed term, you could face break and refinancing fees.
- You could still see an increase in your repayments if interest rates rise, due to your variable rate portion.
How to compare split rate home loans
- Interest rate: Shopping around for competitive rates, both interest and comparison rates, is usually a good place to start. The potential added flexibility of a split home loan may not be worth it if the rates you’re paying are not competitive, including the loan revert rate.
- Fees: Split home loans are often considered two separate loans, which could mean you may face more fees.
- Features: If the features available on variable rate loans are of interest to you, ensure the loan options you’re considering offer the ones you desire.
- Split options: Are the lender’s most competitive loan products available for splitting or is the selection limited? Can you select the portion to fix based on your needs? And can you change this down the track if your situation changes?
- Star Rating: If the loan product has been rated by our expert Research team it will have a Star Rating. The products found to be offering outstanding value to borrowers are given a 5-Star Rating. You may also be interested in which lenders were recognised as part of Canstar’s Home Loans Awards.
You can compare home loans that have split rate loan options at the top of the page.
Is a split rate home loan right for you?
This will depend on your preferences and financial situation, as well as the interest rate environment at the time. If you want the certainty that comes with a fixed rate, while enjoying the features and extra repayment options of a variable rate loan, a split home loan may be worth considering.
However, if you prefer a more simple home loan, want access to a larger suite of features that come with some variable rate home loans, or plan to refinance or sell your home in the near future, you may want to consider other options.
