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Let’s face it: nothing dims that ‘owning-a-home’ glow faster than realising how much interest you could pay over the life of your loan.

After some soul searching, you may ask yourself:

‘How can I pay as little interest as I can on my loan repayments?’

With so many home loan options available in the market, it can be challenging to know which will best suit your budget.

To help you make a more informed decision, meet…

… the split rate home loan.

Man with glasses pointing thumbs at chest

AKA ‘the mullet of the home loan world’, thanks to its financial stability and spontaneity.

Let’s get to know the split rate home loan and put it to the test. This way, you can understand how this loan feature could help you weather interest rate peaks and troughs.

What is a split rate home loan?

A split rate home loan lets you chop your mortgage into both fixed and variable interest rate portions. These portions typically will fall into two loan accounts with different rates and fees. Once the fixed interest period ends, that portion of the loan reverts to a variable rate.

If you don’t split your home loan, you can either:

  1. stick to a fully variable rate home loan (typically the popular option for many loans); or
  2. fully fix your mortgage to one rate for a specified period (usually one, three or five years).

Types of interest rates on a home loan

Variable rates can ebb and flow based on:

  • the Reserve Bank of Australia’s (RBA’s) decisions on where interest rates sit (i.e. rate cuts or hikes)
  • how your lender responds to the RBA’s decisions (e.g. how much of an interest rate cut they’ll pass on to their customers).

Variable rates might suit you if you’re a solid budgeter and financially prepared for potential interest rate hikes.

Fixed interest rates:

  • don’t change, despite the RBA’s decisions on interest rates
  • are locked in for a period you agree with your lender
  • revert to a variable rate when the fixed period ends – unless you opt to fix again.

A fixed rate might suit you if you want financial stability, as you’ll always know how much interest you’re paying on top of your usual repayments on your outstanding balance.

Split rates feature:

  • both fixed and variable rates home loan.

A split home loan might suit you if you want the best of both worlds (i.e. variable and fixed rates).

See how these loan types stack up by using our handy comparison service. In minutes, you can compare variable and fixed loans from some of Australia’s major lenders.

Enquire about any of our loans, and one of our trusted brokers will call you to guide you through the next steps – including splitting your loan!

Split home loan pros and cons?

Both variable and fixed-rate mortgages have their pros and cons – naturally, so too do split home loans. Keep in mind, though, that when you marry both variable and fixed rates, their pros and cons may (or may not) balance each other out.

 

✔ You have some budgeting security, thanks to the fixed portion

For the fixed portion of your loan, you’ll know what your weekly, fortnightly or monthly repayments will cost you. Such certainty is helpful when it comes to budgeting – especially if you’re a first home buyer and navigating repaying a substantial debt for an extended period.

✔ Fixing a low rate means you might save money on interest

If you’re savvy and lock in a relatively low-interest rate, you can benefit from paying less on the fixed portion of your mortgage if rates go back up.

✔ If rates drop, your variable portion will likely see some interest savings

If you have a split account and interest rates fall, you might pay less interest on your variable portion than on your fixed portion. Your fixed interest rates would remain unchanged, which means they could be higher than the drop.

✔ You may be able to make extra repayments on your variable portion without penalty

With a split rate home loan, you could make extra repayments on the variable portion of your loan, usually at no additional cost. As such, you could pay back the variable portion of your loan faster and – in doing so – pay less interest overall.

You typically wouldn’t have the freedom to do this on the fixed portion of your loan. If your lender lets you make extra repayments on your fixed portion, repayments will likely be limited to a certain threshold.

✔ You aren’t bound to split your mortgage into specific portions

How much of your home loan you decide to cut into fixed and variable is really up to how risk-averse you are.

If you’re concerned about your ability to financially cope with increased interest rates, you might, for example, decide to fix 60% of your loan into one interest rate. The remaining 40% can change depending on what the Reserve Bank of Australia (RBA) and your lender decides to do.

✘ Fixing a rate now might mean a loss later

If interest rates do drop below your fixed rate, you won’t benefit from these market changes on this portion of your loan.

This is where you’re ‘hedging your bets’ when you split a loan: if rates drop, you might still benefit from these changes, thanks to the variable portion of your loan. How much you benefit, though, depends on how much of the rate cut your lender passes onto you.

And, the exact opposite also applies! If interest rates go up, you could pay hundreds more in interest on the variable portion of your loan (depending on how much is left owing).

✘ Paying off your loan early or refinancing? You’ll need to pay a break fee

If you decide to sell your property, refinance, or you pay off your loan early, you’ll need to pay your current lender a break fee for the fixed portion of your loan.

Break costs may also apply if you pay extra on the loan that exceeds the threshold the bank may apply to fixed loans.

For all loan types, you may need to pay a discharge fee if you want to refinance or pay off your loan early.  You pay this fee for your current bank to have their interest removed from your property’s title.

As these fees can be expensive, we recommend you ask your lender how much it could cost you to refinance or pay off early.

✘ Double the account-keeping fees

As you’ll essentially be taking out two loans, you may attract two lots of account-keeping fees for each loan type.

Could a split home loan save you money?

Yes and no. Super helpful, right?

There is indeed no way of knowing for sure what the interest rates will do in the future. So, you’re taking a chance when you decide to go fully fixed or fully variable. With a split home loan, you’re diffusing the risk of both interest rate options, while reaping their potential rewards.

To demonstrate this, we need to see how interest rates from lenders have tracked in the past, and when it might have been better to go fixed or variable. Take a look at the graph below:

Source: Reserve Bank of Australia

Home loan types: Variable and fixed, standard owner-occupier. Indicative rates only.

Accessed 15 July 2020

Take a look at September 1990 in particular. Variable lending rates were sitting at 16.19% and fixed rates were sitting at 15.50%.

Let’s say you fixed that 15.50% rate for three years; you could be paying much more in interest than those who stuck to variable rates. How so? At the end of your three-year term at September 1993, variable interest rates were sitting at around 9.50% – a whopping six per cent lower than your original fixed rate.

If you had gone variable or, at least, split your home loan, you might have benefitted from these rate cuts.

Similarly, during the Global Financial Crisis (particularly during 2008 and 2009, according to the RBA), a variable home loan might have been ideal before rates plummeted.

So, the virtue of a split loan is that you can account for highs and lows in the market, which can be crucial when you’re on a budget.

Three-year snapshot: Fixed vs variable vs split rate home loans

To further demonstrate the potential interest savings one type of loan may offer over another, let’s see how fixed, variable and split-rate home loans may have fared from 2017 to 2020.

The interest rates used below are indicative historical lending rates sourced from the RBA. These rates are based on standard owner-occupier home loans.

Keep in mind: This example doesn’t account for fees associated with fixed and variable loans. So, while one loan type may mean you’re spending less on interest, there’s a chance you could still pay more overall when loan fees apply (which vary between lenders). As such, it’s important you also look at the comparison rate (interest plus annual fees) when comparing home loans.

Picture this

 In June 2017, you take out a $300,000 home loan over 25 years.

You could choose to either fix an interest rate for a period (let’s say three years), stick to variable, or split your loan.

What do you do?

Option 1: You fix your rate

So, you’ve set a 4.15% interest rate for three years. Here’s how much interest you may need to repay on your $300,000 loan during this fixed period.

Fully fixed home loan (2017-2020)
3-year fixed interest rateTotal interest paid over 3 years
4.15%[1]$36,055.83
Total interest is rounded to the second decimal point.

 

Option 2: You stick to variable rates

Feeling lucky, huh?

Let’s see how much interest you might need to pay on a $300,000 variable rate home loan over three years. This will be interesting, as rates varied from a top of 5.23% to a low of 4.52% within this three-year span.

Fully variable home loan (2017-2020)
Variable interest rates over 3 yearsTotal interest paid over 3 years
Rates ranged from 5.23% to 4.52%[2]$44,659.20
Total interest is rounded to the second decimal point.

 

Option 3: You split it up

You’ve decided to hedge your bets and split up your loan. You’re a balanced individual, so you decide to split your loan to 50% fixed and 50% variable.

Here’s how much interest you might have paid on this type of loan.

50/50 split home loan (2017-2020)
Fixed interest rateFixed portion (50%)Total interest paid over 3 years
4.15%$150,000$18,027.92
Variable interest rateVariable portion (50%)Total interest paid over 3 years
Rates ranged from 5.23% to 4.52%$150,000$22,329.60
Overall interest paid over 3 years:

$40,357.52

Total interest is rounded to the second decimal point.

The verdict

If you’d fully fixed your loan, you’d be paying $8,603.37 less in interest over three years than if you’d had a fully variable rate home loan.

Out of all three options, you would have paid the most interest over three years with a variable home loan.

The 50-50 split loan is a happy medium. While it would cost you $4,301.69 more in interest than fully fixed for the set period, you’re not spending as much in the above scenario than if you’d had a fully variable loan.

Don’t forget that this finding isn’t consistent for every scenario; think to the early 1990s or the Global Financial Crisis, where variable rates may have been better for your budget.

The moral of the story?

While it might not always be the most cost-effective option, splitting your loan can help mitigate the risk of changes to interest rates – both the ups and downs.

Remember, when you do consider which home loan is right for you, ensure you look beyond just the interest rate. It’s crucial to evaluate any other loan fees that may apply. Also, ensure any other features of the loan (redraw facility, offset account, etc.) and how you want to pay the loan (i.e. weekly, fortnightly, monthly) aligns with your budgeting goals.

Frequently asked questions

How do I apply for a split home loan?

The first step in applying for a split home loan is to compare your options, whether you’re a first home buyer or are refinancing.

By comparing interest rates, fees and loan features, you can make a more informed decision about one of your biggest investments.

Our handy comparison tool makes it possible for you to easily compare a range of loans from some of Australia’s major lenders. On the one page, you can see how the loans on our panel stack up against your needs and financial goals.

All you need to do is enter a few details into our service, including:

  • the property’s value
  • if you’re investing or purchasing to live in
  • how much you’ll need to borrow
  • your postcode.

Once you enquire on a loan that looks good to you, one of our trusted brokers will contact you to chat through the next steps; they’ll also talk you through your options if you want to split your loan.

What’s more, our brokers will take on the heavy lifting that comes with taking out a loan by liaising with the lender until settlement.

Can a guarantor help me take out a split loan?

Like with other loan types, a guarantor can help you apply for a split rate home loan. This option might be helpful if you’re a first-home buyer, as a guarantor (usually an immediate family member, like a parent), uses their home’s equity* to help you secure your loan if you have a small deposit.

Like with any big financial decision, both yourself and your guarantor must be aware of the risks that come with taking out a loan before signing on the dotted line.

*Equity is the difference between the value of the property and how much is still owing to the lender. The more that has been paid off on the loan, the more the equity increases if the home’s value also increases. You can use equity to borrow more money for renovations or purchasing another property, for example.

Does a split loan help me pay off my mortgage faster?

Depending on interest rates and your financial circumstances, a split loan may help you pay off your mortgage faster compared to a fully fixed or fully variable home loan.

For instance, with a split loan, you can make extra repayments on your variable portion without penalty from your lender. On the flip side, you may lock in a low-interest rate for a few years with a fixed loan. In doing so, you will pay more on the principal of your home loan (the amount borrowed) than on interest.

Furthermore, if you secure an offset account with your split rate home loan, you may pay less money on interest and more on your principal.

An offset account works just like a savings account. Any money you place into this account is treated as a payment towards your loan in addition to your usual repayments. As such, the more you have in your offset account, the less you’ll need to pay on interest.

Can I get a split loan feature on an investment loan?

Yes, you can take out a split loan for an investment property. Keep in mind, though, that lenders treat investment home loans differently to standard loans, as these loans can feature tighter lending conditions.

For example, you’ll need to submit a larger deposit for your loan than you would for an average owner-occupier loan. Also, you may notice that investment loans have higher interest rates than standard owner-occupier loans.

Before taking out any loan, it’s important you talk to a either your lender or a broker. When you enquire about any of the investment home loans featured on our service, one of our trusted brokers will contact you to talk you through the next steps.

Sources

[1] Reserve Bank of Australia. ‘Statistical Tables: Interest Rates – Lending Rates – F5’. Figures gathered 15 July 2020.

[2] Ibid.

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