In a rising property market, a split mortgage can be a safe bet.
You can save hundreds off your mortgage repayments when interest rates are low and partially shelter yourself when rates get hiked.
However, there are some drawbacks with split home loans that you should carefully consider.
How much could you save by splitting your loan?
Use the split loan calculator to work out your fixed and variable repayments and how much you could potentially save.
There are many different types of home loan products, each with pros and cons depending on your financial situation and long-term plans.
Call us on 1300 889 743 or complete our enquiry form and we can provide you with some recommendations based on your situation.
What is a split mortgage?
A split mortgage, or a split rate home loan, is a loan feature that allows you to split your home loan into multiple loan accounts that attract different interest rates.
A popular example for this is to split the home loan into a variable interest rate component and have the rest of the loan amount fixed.
The fixed component effectively allows you to manage the risk of interest rate fluctuations.
At the same time, you can take advantage of rate cuts with the variable portion.
You can allocate as much as you want to each account as long as it’s allowed by the lender.
Example of splitting your home loan
Let’s say that you borrowed $500,000 over a 30-year term and fixed $300,000 at 3.90% per annum for 3 years and kept the remaining $200,000 variable at 3.59%.
Your fixed monthly repayments would be around $1,415 and your variable repayments would $908, bringing your total repayments to $2,323 per month.
After 6 months, your lender increases its variable rate to 3.79% p.a., bringing your total mortgage repayments $2,345, or an increase of $22 per month.
If you were instead to keep your home loan entirely variable, your repayments would have increased from $2,270 to $2,327, or an extra $57 per month.
Similarly, if the variable rate were to decrease to 3.40% p.a. on your split loan, your total repayments would decrease to $2,301, saving you $22 a month.
Is loan splitting suitable for me?
Call us on 1300 889 743 or fill in our free online assessment form to speak with one of our brokers and find out if a split home loan is suitable for you.
What are the benefits of a split rate home loan?
By splitting your home loan into two, one fixed and the other variable, you can enjoy the benefits of both sides while lessening the risk and effect on each option. In particular, a split mortgage offers:
- Security: The fixed rate portion of the loan allows you to manage the risk of interest rate fluctuations. This protects you against sudden rises in interest rate.
- Flexibility: The variable component is the more risky side since there is the risk of an interest rate rise. However, the flexibility of this portion allows you to take advantage of potential decrease in interest rates.
- Competitive rates: You can get a competitive interest rate which can be secured with the fixed rate, while retaining the flexibility on the variable side.
- Unlimited repayments: You can make unlimited extra repayments on the variable side of the loan, which means you can reduce the size of the loan much quickly.
- Offset: Some lenders provide you with the option to have an offset account. This can help you save a lot of money on interest.
What are the advantages?
- You get the best of both worlds: rate security and the opportunity to save hundreds if variable rates drop.
- You can make unlimited extra repayments on the variable portion.
- You can qualify for additional features on your variable portion which help you to better manage your mortgage and pay it down faster, such as an offset account or a redraw facility.
- There are no restrictions on how you split your home loan, whether it’s 50/50, 70/30 or 60/40 (most lenders only allow two splits).
What are the drawbacks?
Aside from the benefits of a split mortgage, there are some things that you need to consider before you apply, which can include:
- Missing out on potential interest rate drops on the fixed component of the loan.
- Paying more on the variable component if the interest rates rise.
- Additional fees, such as account-keeping costs may be charged on both the fixed and variable sides.
- You may be charged a break cost on the fixed term portion if you pay out the mortgage early.
How do I apply for a split mortgage?
Before you choose a home loan, it’s always a good idea to think about where you’ll be in the next 5 years. This will help you choose a loan with suitable features and interest rates.
Choosing a fixed rate or variable interest rate home loan comes down to how well you understand the interest rate cycle. If you’re not sure about how the interest rate cycle is doing then a split loan may be a suitable solution for you.
This allows you to get the best of both components and the effects of each feature is halved. This means that although the interest rates rise in the future, only a portion of your loan will be affected.
A split mortgage is a feature that is included in a loan package when you apply for a home loan. Keep in mind that it isn’t a separate loan by itself.
Speak with your lender or credit provider if this feature can be included in a loan package which you can add when you apply for a home loan.
How much can I split?
There is no concrete rule to how much you can split, which means that you can split your mortgage by any amount you want.
For instance, you can split the loan down the middle or 50/50, or you can split it 20% variable and 80% fixed.
Keep in mind that splitting a mortgage means you distribute interest rate movements, as well as the risks involved with each feature. It’s essential that you seek advice from a professional financial planner before you decide to choose a split mortgage.
What does the fixed portion offer?
A fixed rate allows you to lock in your home loan for a certain period of time, usually one year, three years and 5 years. During the fixed period, the interest rate on the loan will remain the same in spite of any changes made to the official cash rate by the RBA.
For example, if you fix a $300,000 loan for 3 years, the interest rate on your loan will not be affected by any interest rate fluctuation over the next three years.
When the fixed term ends, the interest rate reverts back to a variable rate.
What does the variable portion offer?
The variable portion of the split mortgage will be set to the bank standard variable rate (BSVR), that is, the interest rate set by the bank.
For example, if you take out a 30 year loan worth $300,000 with a variable rate of 4.50%, your monthly repayments would be around $1,520. However, a 2% rise in the interest rate in the next five years means your monthly repayments would increase by more than $300 a month to $1,847.
However, variable rates can be quite flexible, especially because you can make unlimited extra repayments. You can also get an offset account that will allow you to offset part of your monthly interest.
In some cases, you can even save on interest if the rates drop further in the next few years.
Split mortgage FAQs
Can I get a guarantor to secure the split loan?
Yes, a guarantor to assist you to buy a home. Generally, with the help of a guarantor, lenders allow you to borrow 100% loan to value ratio (LVR), even 105% to cover additional costs such as government stamp duty.
Most lenders even waive the requirement for Lenders Mortgage Insurance (LMI) if you have a guarantor.
Our mortgage brokers are guarantor home loan experts. They can help you find a suitable lender that can meet your home loan and financial needs from our panel of almost 40 lenders.
Call us on 1300 889 743 or complete our free online assessment form to find out if you qualify.
Will I be able to pay off my loan faster?
Provided that the interest rate doesn’t rise and you can use the split mortgage effectively, you may be able to pay off your mortgage early.
Also, using your offset account more effectively and making regular additional repayments can also help you stay on top of the mortgage.
Can I get a split loan feature on an investment loan?
Yes, split loans are available on loans for investment purposes.
Above all, you need to consider your plans over a 5-year period.
Over a 30-year term, there’s a higher chance that you’ll pay more in interest for your home loan.
However, for investors planning to sell their property within 5 years, a split mortgage can give you some of the flexibility and short-term stabiltiy that you’re looking for.
Discover if you qualify for a split home loan
We can fully assess your needs and financial situation and help you to make an informed decision when choosing a split mortgage.
Call us on 1300 889 743 or fill in our free assessment form to speak with a mortgage broker today.