How much interest you pay over the life of your loan – and month to month – depends on your interest rate and your loan term. When choosing your interest rate, the two options most people know about are a variable interest rate that can change when the cash rate changes or when the institution feels like it, or a fixed interest rate that stays the same for a certain time period no matter what the market does. But there is a third option – the split loan.
In a split home loan, you are essentially splitting your home loan into two separate loans charged at different rates. Usually, a portion of the balance of your loan is charged at a fixed rate for a period of time, while the rest of the balance is charged at a variable interest rate.
When the fixed rate period ends, the loan continues on the variable interest rate.
The benefits are that the fixed rate portion lets you know what your monthly repayments will cost, while the variable rate means you’ll benefit if interest rates go down. Splitting your home loan also typically helps you pay less interest on your monthly repayments and over the life of your loan.
Not every financial institution offers a split loan option, so check the Split Loan Option column in our comparison tables when searching for a loan that suits your needs.
Try our Home Loan Split Calculator to see how splitting your home loan between variable and fixed interest rates at different amounts could help you save on interest.
How we made our calculations
The calculations we’ve made are based on inputting the following data into our calculator, except where we have specified otherwise.
- Loan Amount: $400,000
- Repayment Frequency: Monthly
- Home Loan Term: 25 years
- Fixed Portion: 60%
- Fixed Period: 3 years
- Fixed Interest Rate:48% (average 3-year fixed interest rate on our database at time of writing)
- Fixed repayment: $1,331/month
- Variable Interest Rate: 90% (average standard variable interest rate on our database at time of writing)
- Variable repayment: $926
- Total monthly repayment: $2,257
According to Canstar’s comprehensive research database, the majority of Australians (60%) are looking for a loan amount of between $350,000 and $749,000 – so we’ve based our home loan calculations for this article on a loan of $400,000. You can enter the specific loan amount you are looking for in our home loan calculators and our comparison of home loans on the market.
When considering your monthly repayments, please remember that what is affordable for you depends on your personal financial situation and may be different from the figures we have used in this calculation. Canstar also makes no guarantee that your financial institution of choice will offer you monthly repayments of a certain amount, and you should speak with a financial adviser before making any decisions.
Split Loan vs. Variable Only Loan
With the average fixed rate still sitting lower than the average variable rate at the time of writing, split loans can save you a significant amount of money compared to home loans with a variable rate only. You pay less monthly and also over the life of your loan in interest.
|Loan Type||Monthly repayment||Interest payable
over loan term
Obviously, if you can afford to make additional repayments – without incurring extra fees or dipping into your emergency savings to do so – you will be able to pay off your loan even faster and pay less interest over the life of the loan.
Use our Home Loan Extra Repayments Calculator to work out how additional repayments could affect your loan.
Fees for a split loan
Remember, there is much more to the cost of a home loan than just the interest rate, fixed rate or not. When you’re comparing home loans using our comparison tables, check what the comparison rate is, as well as what ongoing fee and up-front fee the institution charges.
Because choosing a split loan involves taking out both a fixed and variable loan, you have to consider whether you might end up paying more in fees than if you’d chosen one standard variable loan.
We’ve compared the fees, and fixed loans do appear to have slightly higher average ongoing annualised fees than variable loans. They also appear to have higher average up-front fees for residential properties; however, for investment properties, a fixed loan offers a slightly lower up-front fee than a variable loan.
For this reason, the fees may be cheaper for a standard variable loan than for a split loan.
|Loan||Average up-front fee||Average annualised ongoing fee|
|Residential Variable Loan||$444.39||$121.43|
|Investment Variable Loan||$460.83||$126.77|
|Residential 3-Year Fixed Loan||$450.66||$144.35|
|Investment 3-Year Fixed Loan||$438.21||$151.75|
Based on the loan amount of $350,000 and 80% LVR.
How much to fix?
Our calculator lets you allocate any portion you like of a hypothetical split loan to a fixed rate. Financial institutions may allow you to allocate set portions of a split loan to a fixed rate.
For the sake of providing some examples on savings you could make by allocating more or less to a fixed rate, we’ve chosen to allocate 80%, 60%, and 40% to a fixed rate on a split loan of $400,000.
|Fixed rate portion (%)||Monthly repayments||Total interest payable|
As you can see, you can save an extra $3,500 in interest over the life of your loan by allocating a higher portion of your loan to a fixed rate. Of course, that means you have to accept that if interest rates drop, only 20% of your loan will benefit from the lower rates.
Interest rates – what’s on offer
The savings we’ve listed above may look small, but keep in mind that we’ve been considering the average fixed and variable rates on our website. Let’s take a look at how much you could save with a split loan (60% fixed for 3 years, followed by the average variable rate) when using the minimum and maximum rates available on our database at the time of writing.
What we found is that while a split loan is valuable when the fixed rate is lower than the standard variable rate, it will cost you more with the maximum fixed rate available.
However, the maximum variable rates available are much higher than the maximum fixed rates. So a split loan would still save you money if there weren’t any good variable loans on the market when you were looking to buy.
|Monthly repayment||Interest over loan term|
|Source: Canstar Split Loan Calculator.|
|Monthly repayment||Interest over loan term|
|Source: Canstar Home Loan Repayments Calculator.|
Home loan calculators to help you work out your financial position
Use Canstar’s home loan calculators when you’re doing your sums about how much you can afford to borrow in a home loan:
- Home Loan Borrowing Power Calculator
- Home Loan Repayments Calculator
- Home Loan Extra Repayments Calculator
- Home Loan Lump Sum Repayment Calculator
- Home Loan Honeymoon Rate Repayment Calculator
- Home Loan Stamp Duty Calculator
- Home Loan Split Calculator (variable/fixed interest split loan interest rate)
- Home Loan Comparison Calculator