The Split Home Loan

A split home loan allows borrowers to divide their mortgage into two portions: one with a fixed interest rate and the other with a variable rate. The borrower determines the proportion allocated to each portion based on their financial goals and risk tolerance. This structure provides a balance between the security of fixed repayments and the flexibility of a variable loan.

Pros of the Split Home Loan

Greater Budget Stability

• By fixing part of the loan, you reduce the impact of interest rate fluctuations, making it easier to plan your finances. Example: If you split a $500,000 loan into 50% fixed and 50% variable, only $250,000 is subject to market rate changes, while the other half remains steady.

Benefit from Interest Rate Drops

• If interest rates decrease, the repayments on the variable portion of your loan will also reduce, offering potential savings. Example: If the Reserve Bank of Australia (RBA) lowers the cash rate, your variable portion could see a rate reduction, decreasing your monthly costs.

Flexibility to Make Extra Repayments

• Most lenders allow additional repayments on the variable portion without penalty, helping you pay off your mortgage faster. Example: You receive a work bonus and apply $10,000 to the variable portion, reducing interest costs and shortening the loan term.

Protection Against Interest Rate Rises

• A fixed portion safeguards part of your loan from sudden rate hikes, providing cost certainty. Example: If rates increase by 1%, only the variable portion of your loan is affected, minimizing the impact on your repayments.

Potential Access to Redraw and Offset Accounts

• Lenders may offer offset or redraw facilities on the variable portion, allowing greater financial flexibility. Example: You deposit savings into an offset account linked to the variable portion, reducing interest payable on that part of the loan.

Cons of the Split Home Loan

Interest Rate Increases Impact the Variable Portion

• If rates rise, the repayments on your variable component will also increase, potentially straining your budget. Example: If your loan is split 70% variable and 30% fixed, a 1% rate increase could significantly impact your monthly repayments.

Limited Additional Repayments on the Fixed Portion

• Many lenders restrict or penalize extra repayments on the fixed part of your loan, limiting your ability to pay it off faster. Example: A borrower wanting to make a lump sum payment on the fixed portion may face a $500 penalty or be limited to an annual extra repayment cap.

Break Fees for Exiting the Fixed Portion Early

• If you decide to switch loans, refinance, or pay out your fixed portion before the term ends, you may incur significant break costs. Example: Breaking a fixed-rate loan due to refinancing could cost thousands, depending on interest rate movements and the lender’s policies.

Complexity in Managing the Loan

• Unlike a standard variable or fixed loan, a split mortgage requires careful monitoring and decision-making regarding the proportion of each portion. Example: If rates are volatile, adjusting your split ratio in the future might be challenging or come with costs.

We’ll walk you though the process and ensure you are structured for maximum wealth creation and lowest repayments.