Split Rate Home Loan

What is a Split Rate Home Loan?

A split rate home loan offers enormous flexibility by enabling you to split your home loan into two parts, and borrow one part on a variable interest rate and a second part on a fixed interest rate.

By splitting your home loan you gain all the flexibility of variable rates whilst also enjoying the security of a fixed rate, plus the variable rate also provides a range of features designed to help repay your home loan faster, such as extra repayments and redraw facilities.

The choice of how you want to split your home loan is pretty much in your hands, with a 50/50 split being the most common approach. The decision on how much to apportion to each part of your split rate home loan is largely dependent on how much risk you are comfortable with relative to the propensity for up or down movements of the cash rate.

Guide to Selecting the Best Split Rate Home Loan

 

What type of homebuyers chooses Split Rate Home Loans?

Split rate home loans are popular with borrowers who are seeking to spread their interest rate risk, specifically in times when interest rate rises occur. By splitting the loan the fixed portion delivers absolute certainty on the repayments for that portion of the loan, which can be an enormous help with budgeting, whilst the variable portion of the loan provides the ability to use any spare cash to pay down your home loan and save interest both by reducing the principal and also the loan term.  

 

Pros of a split rate loan?

  • It’s flexible - The variable part of your home loan may include the ability to make extra repayments above your minimum repayment level and if required redraw some, or all of these extra repayment amounts later on. This flexibility means that you can use any spare cash when you have it available to reduce your interest repayments and if you can avoid redrawing these repayments also reduce the term of your loan.
  • The borrower defines Split ratios - The majority of lenders leave the decision on how to split the loan, between variable and fixed rate parts, with the borrower.
  • Interest rate rises and drops have less impact – By splitting your home loan your fixed rate part offers a defense against interest rate rises whilst your variable rate part means you will see some of the benefits of any interest rate falls.
  • Change your Split ratio’s - Some lenders will allow you to split your loan up to four times, which means you can customize customize your fixed and variable loan parts to suit your circumstances.

 

Cons of a split rate loan

  • Split ratio’s can hurt you - Split loans certainly can help you reduce your exposure to interest rate changes but if you choose to split your home loan significantly toward one type of loan you may still feel the pain of an interest rate change. For example if you choose to split your loan 80% fixed and 20% variable you are adopting a relatively conservative approach and probably believe interest rates are going to rise. If they in fact fall, the benefits of this will be only potentially felt on 20% of your loan, as the remaining 80% is subject to a fixed rate.
  • Doubling up on loan fees - As you have two loans (one fixed, one variable), you maybe hit with administration fees for both.

Frequently Asked Questions

How can Splitting My Home Loan help me?

Splitting your loan into different components may help you to reduce the impact of interest rate fluctuations while retaining the features and benefits you want. For example a fixed rate home loan gives you the confidence of knowing how much your repayments will be and protects you against rate rises. In comparison, a standard variable rate home loan allows you to make extra repayments and gives you the flexibility to redraw them at any time.