Time to read : 5 Minutes
In the great game of mortgages, the humble home loan has diversified faster than a contestant on The Apprentice trying to sell kombucha to pensioners. One such invention is the split home loan – a Frankenstein’s monster of fixed and variable rates stitched together for what many claim is the ‘best of both worlds’.
But is it really the savvy borrower’s secret weapon, or a cleverly disguised admin headache? As a former mortgage broker, I’ll shed some light so let’s dive in.
What is a ‘split’ home loan?
A split loan lets you divide your mortgage into two (or more) portions. Part of your loan can be placed on a fixed interest rate and the other part on a variable interest rate.
The idea is that you get the predictability of fixed repayments, with the flexibility and potential savings of a variable loan. The ‘best of both worlds’ is how it’s often described.
Before we get into it, here’s a quick recap of the differences between a fixed rate home loan and a variable rate one.
Fixed home loan interest rates
These stay the same for a set period (usually between one and five years), meaning your repayments won’t change during that time.
Fixed rates offer certainty and make budgeting easier, but there are usually limitations regarding extra repayments, additional loan features and flexibility. For example, you can’t usually attach an offset account to a fixed rate loan.
Variable home loan interest rates
These rates rise or fall, depending on market conditions and the cash rate set by the Reserve Bank of Australia (RBA).
Your home loan repayments will change accordingly, but you usually get more features like unlimited extra repayments, redraw facilities, and offset accounts to help you get ahead on your home loan repayments.
💡 In short: fixed = stability, variable = flexibility.
A split loan can make it easier to manage your finances, with one eye on your future life plans and financial goals as well.
How many ways can you split your home loan?
Assuming you qualify for a split loan structure, the way the borrowed amount can be split depends on your lender’s policies. Some lenders don’t mind how it’s cut; others have strict rules.
If, for example, you have $30,000 in savings and apply for a $600,000 loan, you might want to fix $570,000, with only the remainder on a variable rate so you can place your savings in an attached offset account. Learn more about the benefits of having an offset account.
In this example though, you might find a lender won’t allow such a low loan amount; they may have a minimum of at least $50,000 or even $100,000. This is definitely a conversation to have with your mortgage broker when you’re deciding which lenders to approach.
The pros of splitting your home loan
One of the most important points to note about split loans is that even though you have one mortgage, the splits are basically treated as two loans by most lenders. For example, if you have a $600,000 home loan, and a 50/50 split, your lender will see it as two loans of $300,000 – one on a fixed interest rate, and the other one on a variable rate. This comes with a number of advantages for you as the borrower.
Rate hedging
With a split loan, you're not putting all your eggs in one interest rate basket. If variable rates rise, the fixed portion of your loan offers stability. If interest rates fall, the variable portion of your loan can take advantage of the drop. You might not beat the market, but you’ll soften the blow for yourself – and your household – either way.
Budgeting flexibility
The fixed-rate component of your loan gives you repayment certainty. It’s ideal for those who want to know exactly how much is being spent each month on housing costs. Great for new parents, spreadsheet lovers and anyone who flinches when interest rates are mentioned on the news.
Future-proofing your finances
Many fixed-rate loans limit the amount of extra repayments you can make in a calendar year (sometimes to just $10,000 per year, sometimes even less). Your variable loan portion usually allows unlimited extra payments, and access to an offset account. So, you can throw extra funds at your mortgage when you get your bonus, inheritance, or finally sell that rogue exercise bike.
Any extra repayments can help you:
get ahead on your home loan
pay it off faster
create a buffer for future income shifts (for example, if you or your partner need to take a work hiatus for any reason).
The cons of splitting your home loan
You must qualify for each component of your loan structure under the relevant requirements.
You probably already know that the fixed rates lenders offer are different from their variable rates. Did you also know that the qualifying interest rate on your home loan assessment (the interest rate the lender is offering you plus the legally required serviceability buffer), will be slightly different for each part of your home loan?
As I mentioned earlier, it’s like two separate mini-loans making up the structure that is your mortgage.
Twice the admin
Split loans mean double the paperwork, double the statements and potentially double the confusion. So unless you get a kick out of calculating the average interest across two loan portions, this one’s not for you.
Fees and fiddly bits
Depending on your lender, you may be up for extra setup or account-keeping fees for each portion of the loan. Yes, there’s no simplicity.
Also, some lenders are about as flexible as a Victorian corset when it comes to split loan terms. Not all lenders will offer the features you want for both of your loan components, so pay attention to the fineprint.
Refinance resistance
If you decide you want to refinance or switch loans mid-way through your fixed term, you will be hit with break fees for this portion of your loan. They’re as unpleasant as they sound – and often expensive.
Splitting your loan may tie you to a portion of your loan that you can’t break up with easily, even if it’s no longer the best structure for you.
Who should consider a split home loan?
Split loans suit those who like the idea of balance. If you're not sure where interest rates are heading (spoiler: no one is), and you want some repayment security without missing out on potential savings, splitting your loan can be a sensible middle ground.
They’re especially handy if:
You’re risk-averse, but still want to pay off your mortgage faster.
You’ve got inconsistent income (hello, freelancers and commission workers).
You’re planning to keep your property long-term, but might want flexibility down the track.
The purpose of your property may change (eg you’re living in it now, but may rent it out for a while later on).
Bottom line
Split loans aren’t automatically better or worse than fixed or variable loans. They’re just a bit more nuanced. Like oat milk in coffee, they work well for some, but leave others wondering why they didn’t just keep it simple.
Consider your financial goals, your risk tolerance and – importantly – your ability for managing more than one loan account.
If in doubt, talk to a mortgage broker who can walk you through the maths without needing a whiteboard and a blood pressure monitor.
A split loan might not change your life, but it could make your mortgage a little more financially manageable. Just make sure you know what you're getting into – because while two heads may be better than one, two loans need twice the attention.
Go deeper:
Can an offset account help you break up with your bank faster?
Why are home buyers choosing to borrow from non-bank lenders?
Financial disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
