Split home loans: how part fixed, part variable works
By Zafar Karim, mortgage broker.
Last checked
As at Next checkA split loan has a fixed part and a variable part.
- You choose the split, for example 50/50 or 20/80.
- Only the fixed part's rate stays the same for a set time.
- Fixed parts can have break costs and fewer features.
- The fixed part usually moves to a variable rate when the fixed time ends.
General information only. This is not advice about your situation.
What is a split home loan?
A split home loan divides one loan into two parts. One part has a fixed interest rate. The other part has a variable interest rate.[1]
- A fixed rate stays the same for a set period, usually between one and five years.[1][2]
- A variable rate can go up or down over time. Your lender decides whether to change it.[2]
You decide how to split the loan. Moneysmart gives 50/50 and 20/80 as examples.[2] Lenders set their own rules on how a split can be set up.
Why people split a loan when they are worried about rate rises
No one can know where interest rates will go. That uncertainty is why some people look at splitting.
The Reserve Bank's Monetary Policy Board decides the cash rate target. The cash rate is the rate banks pay to borrow from each other overnight. It has a strong influence on the rates lenders charge.[5]
Variable rates usually respond quickly when the cash rate changes. Rates on existing fixed loans do not change when the cash rate moves.[6]
A split gives you some of both:
- The fixed part gives you set repayments on that part for the fixed period. That can make budgeting easier.[1]
- The variable part keeps some flexibility. If rates fall, repayments on that part may fall too.[1]
A split does not remove the risk of rate rises. It reduces your exposure on the fixed part only. The variable part still moves with your lender's rate.
A worked example (no rates, just the idea)
Say you borrow $600,000 and split it 50/50. That gives you $300,000 fixed and $300,000 variable.
| If this happens… | Fixed part ($300,000) | Variable part ($300,000) |
|---|---|---|
| Your lender raises its variable rate # | Repayments stay the same during the fixed period | Repayments go up |
| Your lender cuts its variable rate # | Repayments stay the same, so you miss out on the cut | Repayments may go down |
| You want to pay extra # | May be limited or not allowed | Often allowed |
| You sell or switch loans early # | A break cost may apply | A discharge fee may apply |
| The fixed period ends # | Usually moves to the revert rate | No change |
A 20/80 split would put less on fixed. More of your loan would move with rates, up or down. An 80/20 split does the opposite.
The trade-offs to weigh
Break costs. A break cost is a fee your lender may charge if you leave a fixed rate early. That can happen if you switch loans, sell the home or pay the loan off.[1][4] Ask the lender how its break cost is worked out before you fix.
Fewer features on the fixed part. Some fixed loans have fewer features.[1] Two common ones are:
- an offset account, which is a transaction account linked to your loan. Its balance reduces the amount you pay interest on.[3]
- redraw, which lets you take back extra repayments you have made. How and when depends on your loan terms.[3]
Moneysmart says offset accounts are generally available with variable loans.[3] With a split, features like these may be available on the variable part.[1] Check which part they apply to.
Extra repayments. Some fixed loans limit extra repayments. The variable part is usually where extra money can go.[1]
The fixed rate may end up costing more. If rates fall, your fixed part stays the same. You could end up paying more on that part than you would have on variable.[1]
The revert rate. When the fixed period ends, the fixed part usually moves to the lender's variable rate. This is called the revert rate.[1] You can then look at fixing again or switching lenders.
More to manage. Moneysmart notes a split loan can be more complex.[1] You have two parts, each with its own rate and rules.
Lenders differ. Lenders have different rules on splits, fixed terms, extra repayments and break costs. The details in the loan contract matter more than the label.
Questions to ask a lender about a split loan
- How much can I fix, and for how long?
- Is the offset account linked to the fixed part, the variable part, or both?
- How much extra can I repay on the fixed part each year?
- How is the break cost worked out, and can you estimate it now?
- What happens to the fixed part when the fixed period ends?
Moneysmart suggests comparing loans using each one's Key Fact Sheet. It lists the loan's rate, fees and repayments.[2]
Is a split loan right for you?
It depends on your budget, your plans and how much change in repayments you could handle. Some questions to think about:
- Could you cope if repayments on the variable part went up?
- Do you plan to sell, move or refinance in the next few years?
- Do you want to put savings in an offset account or make extra repayments?
If you would like to talk it through, Zafar can explain how split loans work with the lenders on his panel. He does not have access to every lender. He can set out the trade-offs for your situation, and you decide.
Want to talk a split through? Request a call with Zafar.
Request a call Call 0402 357 860
Or ask Zafar to call you back
What changed
- : Guide published. Every statement checked against the Moneysmart and Reserve Bank pages listed below.
Read more home loan guides, or see how refinancing works.
Sources
- Moneysmart (ASIC), Fixed vs variable home loan interest rates. Retrieved .
- Moneysmart (ASIC), Choosing a home loan. Retrieved .
- Moneysmart (ASIC), Mortgage offset accounts. Retrieved .
- Moneysmart (ASIC), Switching home loans. Retrieved .
- Reserve Bank of Australia, Cash rate target overview. Retrieved .
- Reserve Bank of Australia, The Transmission of Monetary Policy: How Does It Work? (RBA Bulletin, September 2017). Retrieved .
Common questions
Can I choose how much of my loan to fix?
Usually, yes. Moneysmart gives 50/50 and 20/80 as examples. Each lender sets its own rules, so ask what splits it allows.
Can I have an offset account with a split loan?
It depends on the lender. Offset accounts are generally available with variable loans, so expect it on the variable part. Check which part the offset reduces.
What happens when the fixed part ends?
It usually moves to the lender's variable rate, called the revert rate. At that point you can look at fixing again or switching loans.
Do I pay a break cost if I sell?
You may, on the fixed part, if you sell during the fixed period. Ask your lender for an estimate before you sign a contract to sell.
Will interest rates go up?
No one can know. The Reserve Bank's Monetary Policy Board sets the cash rate target, and each lender sets its own rates. A split simply spreads your loan across both rate types.
Talk to Zafar
Call Zafar, request a call back or send a message. Zafar works with clients across Australia by phone and video, and meets clients in person in Melbourne.