Key Takeaway Table
| Key Point | Description |
|---|---|
| Definition | A split-rate loan is a type of home loan where you divide your mortgage into fixed-rate and variable-rate portions. |
| How Does a Split Home Loan Work? | You can choose how to divide your mortgage. You can choose an even 50:50 split or any ratio like 60:40 or 80:20. Your choice will depend on a few factors, including your financial plans and the market conditions. The fixed-rate portion of your loan will remain the same within the set period, while the variable-rate portion changes as interest rates fluctuate. If applicable, extra repayments are typically made to the variable portion of the loan or into an offset account. |
| Advantages of a Split Home Loan | Split loans provide borrowers with a middle ground, allowing them to take advantage of features from both fixed and variable-rate loans. This way, borrowers can protect themselves against rate hikes while also taking advantage if ever the rates fall. Finally, borrowers can decide how they want to split the loan, offering them the freedom to customise their loan to their circumstances. |
| Is a Split Home Loan Right for You? | If you want to mitigate against future rate rises and make extra repayments ahead of your loan schedule a split loan could be the right option for you. |
A split home loan, also known as a split-rate mortgage, combines the features of both fixed and variable-rate home loans. For homeowners, this type of loan offers a combination of flexibility and stability, which can be great for those with specific financial goals or those who want to take advantage of the benefits of both fixed-rate mortgages and variable-rate home loans at the same time.
How Does a Split Home Loan Work?
A split home loan allows you to “split” your mortgage into fixed-rate and variable-rate portions. This type of loan allows you to choose any ratio — you can choose an even 50:50 split, but you can also do other ratios like 20:80 or 60:40 depending on your preference.
For instance, if you have a loan of $500,000, a 50:50 split would mean $250,000 will have a fixed interest rate and the other $250,000 will follow a variable rate. If your loan term is 30 years, your monthly repayments will total $3323.65. This is how it’s broken down:
| Breakdown | |||
|---|---|---|---|
|
Fixed Portion (5 Years)
|
6.72% Interest
|
$250,000
|
$1,616.51 Monthly
|
|
Variable Portion
|
7.26% Interest
|
$250,000
|
$1,707.14 Monthly
|
(This example references the average fixed and variable interest rates in Australia in January 2024. There are lower rates available – contact us to get a great rate for your split loan)
If there’s a predicted economic downturn, you can choose a split where the fixed-rate half is larger (e.g. 80% fixed, 20% split) to protect you from rising fees. Meanwhile, if the rates are expected to drop, you can choose the opposite.
To give you a better idea of how it works, here’s a table that shows you the key differences between a fixed-rate, variable-rate, and a split home loan:
| Fixed Home Loan | Variable Home Loan | Split Home Loan |
|---|---|---|
|
The interest rate is fixed for a set period, typically around 1-5 years.
|
The interest rate fluctuates with the market and other factors.
|
The loan is split into two parts: one fixed rate and one variable rate.
|
|
The repayment amount remains the same during the fixed period and will change only after the period ends (unless the borrower chooses to refix).
|
The repayment amount can change anytime with interest rate changes and other factors.
|
The repayments for the fixed part of the loan will not change during its set period, but the ones for the variable-rate portion can change anytime.
|
|
During the fixed period, you cannot make early payments without incurring break fees. The borrower can refix or refinance after the fixed period.
|
Home buyers can make early repayments, refinance, restructure, or sell the property anytime without break costs.
|
You can make extra repayments on the variable portion of the loan. However, you cannot do the same for the fixed half without paying break fees.
|
|
The homeowner is protected from rate rises during the fixed period.
|
The homeowner has no protection from rate increases; repayments can increase with rate hikes.
|
The homeowner has partial protection; the fixed portion is protected from rate rises.
|
|
The homeowner cannot benefit from rate decreases during the fixed period.
|
The homeowner can benefit when their lender reduces rates.
|
The homeowner can partially benefit. Only the variable portion benefits from rate cuts.
|
Advantages of a Split Home Loan
Finding a Middle Ground
A split loan offers the flexibility of a variable rate loan (such as the ability to make extra repayments without penalty) alongside the certainty of fixed monthly repayments for the fixed portion of the loan.
Protecting Against Interest Rate Changes
By splitting the loan, borrowers can protect themselves against fluctuations in interest rates. If rates go up, the fixed portion remains the same, which can save money. If rates go down, the variable portion can help borrowers take advantage of lower rates.
Customisation
Borrowers can decide how they want to split their loan based on their financial situation and risk tolerance.
Is a Split Home Loan Right for You?
Split-rate home loans are well-suited to different borrowers and situations. Mostly, split home loans are best for those who seek balance and a healthy middle ground between security and flexibility. However, depending on the borrower and the economic climate, it may also not be the best fit. Here are some factors you need to consider before you make a decision:
Risk Tolerance
Split home loans come with a moderate level of risk. Although the fixed portion of the loan remains constant, the variable portion is still subject to changes depending on the RBA’s cash rate and other factors impacting lenders’ rates. You should choose this type of loan if you’re comfortable taking on a moderate level of risk and if you can confidently cover a higher repayment caused by increases in interest rates.
Need for Flexibility
Consider how much flexibility you need when it comes to handling your loan. Split home loans typically allow for moderate flexibility when it comes to early payments. If you wish to make early repayments, you can do so only on the variable-rate portion of your loan. However, you can have a lot of flexibility when choosing the ratio when you split your loan.
Financial Knowledge
Split loans are best suited for those who are comfortable managing slightly more complex financial products and those who want to actively manage their loan in response to market conditions. If you’re financially savvy and want to strategise to save money and potentially pay out your loan faster, split loans can be a great choice for you.
Future Plans
If you anticipate changes in your financial situation like a pay rise or receiving a lump sum in the future, you may find split loans advantageous. The variable part can be used to pay down the loan faster when finances allow, while the fixed part provides a safety net against rate increases.
Market Conditions
Your decision might also be influenced by current and anticipated future interest rate trends. If the market is volatile, a split loan can help you partially mitigate interest rate increases while also opening yourself to benefit when the rates fall.
Look for the Best Split Home Loans
Split home loans are a strategic choice for borrowers looking to balance their priorities. If you're looking for a split home loan, you should compare different lenders to get the best rates and to see how much flexibility they offer. If you need help finding the right loans and lenders, don't hesitate to seek professional help. Mortgage experts from darkhorsefinancial.com.au will be happy to help you with your home loan needs. Talk to us today.
