A split loan allows you to take advantage of the stability of fixed-rate loans while also benefiting from interest rate fluctuations with variable-rate home loans.
Of course, you should know how they work before you split your loan. This article features helpful information on a split mortgage.
What is a Split Home Loan?
A split home loan is a feature allowing you to parcel or divide your home loan into separate accounts, so they have different interest rates. This means you can assign a portion of your loan into a fixed rate portion and have the remainder as a variable rate home loan.
The fixed portion helps you lock in your home loan for a set time, which usually ranges from 1-5 years. The interest rate reverts to a variable rate once the fixed rate period ends.
In contrast, the variable portion of your split mortgage will be adjusted to the bank’s standard variable rate. This rate will vary depending on the cash rate changes by Reserve Bank.
Essentially, a split loan allows you to customise mortgage repayments to suit your financial circumstances. This is because it combines fixed and variable-interest home loan features.
What is a Fixed Interest Rate?
Fixed-rate home loans are those where the interest rate remains the same for the agreed-upon fixed term. In simple words, a fixed-rate loan help make your budgeting and future planning much more manageable.
A clear understanding of the pros and cons of a fixed-rate mortgage to see if it suits your financial needs.
What is a Variable Interest Rate?
Variable home loans indicate fluctuating interest rates which rise and drop over the loan term. The fluctuations may be due to changes in the official cash rate by RBA, or sometimes it could be a purely business-driven decision by the lender.
You can learn more about the different types of variable-rate home loans and their features to decide if they’re a good fit.
Who Can Split a Home Loan?
Most lenders offer home loan borrowers split loans. However, it may not be available for all products. Therefore you should check at the outset if the loan that your looking at has the option of a split arrangement.
To sum up, split home loans are suitable for the following home loan borrowers who are:
- Indecisive: A split-rate home loan works well for an indecisive borrower who would like to enjoy the advantages of both fixed and variable-rate loans.
- Risk-averse: Homeowners looking for stability and peace of mind may also benefit from choosing a split home loan. The fixed-rate portion of your loan will provide stability for a set period, usually 1 to 5 years.
- Uncertain: It is also suitable for home buyers who feel their personal or financial circumstances are likely to change in future years. This helps protect mortgage repayments against any future interest rate hikes. At the same time, you’ll have the flexibility to make extra repayments on their variable portion when they can.
- Set on Financial Goals: Having a split home loan for those with specific financial goals. Planning and budgeting for long-term goals are easier with a split loan because you know how much your repayments will be for the fixed portion of your loan.
- Investors: Split loans are available for investment property purposes. Over the long term, for example, 30 years, you’ll likely pay more interest on your mortgage. However, a split mortgage may help you with flexibility and short-term stability if you’re looking to sell your property within five years.
Why Would I Consider Splitting My Home Loan?
Here are a few reasons why you might want to split your loan.
Have to Manage Repayments in Uncertain Interest Rate Cycles
If you’re uncertain about where interest rates are headed, splitting your home loan allows you to take advantage of fluctuations. If you anticipate further interest rate rises, a split loan may be able to protect you partially from any rate increases that take effect during the fixed period.
Need Flexibility and Security
A split-rate home loan will help you access a competitive interest rate, which can be secured with a fixed rate while retaining flexibility on the variable rate.
Since you can decide how much to apportion between fixed and variable rates, you can set it up to match your financial needs. This will help you make additional repayments and repay your loan amount sooner, saving on interest.
Also, with a part of the loan on a fixed rate, there’s the security that even if the interest rates were to rise, your monthly repayments on the fixed portion of your home loan would stay the same.
On the other hand, if interest rates drop, you won’t benefit from this part of the loan. Nonetheless, balancing your overall risk is the key here.
How Do Split Loans Work?
A split mortgage is assessed and managed similarly to a fully fixed or variable interest rate loan. However, depending on your lender, you may have to pay a fee to split your loan balance unless it is a packaged home loan.
Nonetheless, when lodging your application, you should mention that you’re looking for a split loan. You must also indicate the eligible loan combinations and the proportion you would like to split your home loan into.
While some lenders may let you decide how much to fix, some lenders apply a minimum dollar or percentage level for dividing the loan. You must be aware of your home loan interest rates, and repayments will be on the fixed rate portion for the set term.
Once you split your home loan, you will most likely have access to most features offered with each type of loan, such as redrawing and making additional repayments on the variable interest rate portion.
When your fixed-rate period ends, the fixed part of the loan gets closed. Then, the remaining portion of the fixed loan gets switched to a variable rate. Alternatively, you could negotiate with your lender to lock in a new split loan or seek another arrangement.
The revert rate may be similar to the rate of your variable portion of the split loan. Depending on your lender, it could also be higher or different from the variable rate.
How Do Split Loan Repayments Work?
You’ll most likely need to make separate repayments regularly on each portion of the split loan.
However, you could arrange with your lender to set the repayment for the same day. This will make planning and budgeting more manageable.
Also, with the split loan, you’ll usually be able to make extra repayments on the variable rate home loan portion.
Switching During the Loan Term
During the loan term, if you think your variable rate will increase, most lenders will allow you to fix that rate and lock in certainty.
Notably, most lenders allow switching from a fixed to a variable rate before the fixed rate term expires. However, you have to pay break costs. So getting clarity on these aspects at the start is advisable before inking the deal.
How Much Can I Split?
In general, there’s no pre-set rule on how you can split your mortgage. You can split it in any proportion you desire between fixed and variable. The risk involved will also be distributed in the same portion.
For instance, you can split it equally or go on for the 70/30 options, where 70% is a fixed-rate loan and 30% is variable.
Taking the following factors into account will help you work out a suitable ratio matching your financial situation:
- Interest Rates: In a scenario where interest rates rise or the fixed rate is lower than the variable rate, a higher proportion of fixed interest rate would be beneficial and vice versa.
- Length of the Loan Term: A higher variable rate portion would be advantageous if you have a shorter-term loan. It can be paid off quickly when rates drop. And if the rates rise, then you would only be paying a small amount of the loan off at the higher rate.
- Assessment of Risks: If you’re comfortable with a higher level of risk, then you can go for a higher variable rate portion. If not, then a higher fixed-rate portion would be a safer bet.
- Personal Circumstances: If you have a regular income and are comfortable making higher repayments, you can afford to go for a higher variable rate portion.
How to Split Home Loan
Here are three basic steps to go about getting a split rate home loan:
1. Identify Potential Options
Speak to your mortgage broker or lender about splitting your loan. However, not all lenders offer this option, so it’s best to check before getting your hopes up.
If your lender offers a split loan, find out the conditions. For example, some lenders may require you to split your loan a certain way, such as a 70% fixed rate mortgage and 30% variable.
2. Lodge Your Application
Once you’ve decided to split your loan, you’ll need to fill out an application form and submit all the required paperwork. This is where you’ll nominate the percentage of your loan that you want to be variable and the percentage that you want to keep as a fixed rate.
3. Get Approved
Once your loan is approved, the funds will be split between a variable rate and a fixed rate account. This is where things can get confusing, so ensure you understand how much is in each account and the interest rates before signing on the dotted line.
If you have an existing loan, you may be able to split your current loan balance into variable and fixed components online without speaking to your lender.
Splitting a Home Loan in Practice
The Smiths take out a $500,000 home loan for 30 years. They consider splitting the loan in the ratio 60:40, where 60% is the fixed component, and 40% is the variable component.
The standard variable rate is 7.30%, and the 4- year fixed rate is 5.64%
Their home loan now gets divided into two separate loans. First, a fixed rate is charged on $300,000. Then, the remaining $200,000 is charged as per the variable rate.
The Smiths use an online split loan calculator to break down their monthly repayments. Per their calculations:
- Their total monthly repayment during the fixed rate period is $3,100.95.
- Of this, the fixed repayment amount is $1,729.81, and the variable repayment is $1,371.14.
- The total interest payable (fixed and variable) now is $708,717.25.
- If they had only taken a variable loan, then the total interest payable would have been $734,027.67
Split Home Loan Pros and Cons
Based on the features and your goals, there are a few pros and cons that come with splitting your home loan.
Pro: Less Affected by Interest Rate Hikes
In a scenario of rising interest rates, if your lender hikes the variable interest rates, you’ll pay more on a variable loan. However, with a split loan - thanks to the fixed portion of the loan - that part of the repayment will remain unchanged. Thus a split loan provides some insulation against rising interest rates.
Pro: Make the Most of Drop in Interest Rates
With a split loan, when interest rates drop, the variable component of your loan will qualify for any applicable interest rate cuts made by your lender. This will reduce your monthly repayments.
Pro: Suited to Your Circumstances
You can split your loan as per your requirements without restricting how you want to structure your loan. For example, some lenders allow loan splits up to four times. This enables you to customise your rate structure to match your circumstances.
If you have a greater need for security, you can opt for a more significant fixed rate. In contrast, if you need loan features like redraw, offset, and extra repayments, you can structure your loan for a more extensive variable component.
Though many fixed-rate loans have these features nowadays, they are usually conditional. For example, they have annual limits.
Pro: Get Home Ownership Faster
Splitting your loan also enables you to make extra repayments on the variable portion of your loan without being penalised. This can help you pay off your loan sooner.
Con: Limited Options
Some lenders offer split facilities on select home loan products. This limits your selection of products.
Con: Costly and Difficult to Manage
When you take a split loan, you take a variable and a fixed loan. As a result, the loan application process and day-to-day monitoring of the loans can be time-consuming and complex.
Moreover, depending on the loan product and your lender’s terms, you could pay fees on two rather than one. And, if you decide to refinance during the fixed term of your split loan, you may have to pay break fees, which may be costly.
Split loans offer some protection against interest rate hikes. However, as they also have a variable loan component, a rise in interest rates could still increase your repayments.
Should I Split My Home Loan?
Once you clearly understand how split loans work, their advantages and the downsides, you’ll be the best person to decide if it’s the right strategy for your needs.
At the same time, here are vital considerations you should take into account:
- Interest Rate Cycle: The decision to split your loan would also significantly depend on your understanding of the interest rate cycle. A split loan may be suitable if you have a good knowledge of interest rate trends and developments.
- Your Home Loan Strategy: A split home loan is only for some and depends on your individual circumstances. It would help if you also know whether you will benefit by paying off your mortgage sooner or fixing your interest rates.
- Your Home Loan Amount: The amount you have borrowed also plays a role in deciding whether to go for a split home loan. If your mortgage is on the lower side, then it might not be ideal to first check about the fees, revert charges and other costs with your lender. On the other hand, if these are significantly high, it might be more practical to just go with a single loan type.
- Your Overall Financial Situation: You might need to have more funds readily available to cover the loan’s variable component if interest rates rise. Therefore you must ensure you have a buffer to make those additional repayments. Otherwise, you could end up in financial hardship.
- Choice of Lender: One of the key points to consider is if your lender offers split home loan options and if their most competitive loans are available for splitting. Further, find out if your lender will give a choice to select the portion to fix and if you can you modify it in future if your circumstances change.
Finally, before proceeding with a split ratio, consult your mortgage broker or use a split loan calculator to determine if the split loan and the fixed-variable proportion selected work for your financial situation.
How Joust Can Help Your Home Loan
Searching for suitable split loan options and products can be time-consuming because every lender has different offers.
The live auction platform on our online marketplace connects you with loans from leading lenders. Get started by submitting a short form with your requirements, and mortgage specialists will bid for your business in real-time.
You can then review the offers, ask questions and select the loan that best suits your needs. And, even then, you don’t have to accept any offers if you’re unhappy with them.
Can I Split My Home Loan Between Two Banks?
In general, splitting a single property loan with two banks might not be possible. A split mortgage is a feature included in your loan package and isn’t a separate loan by itself.
You can change your bank to access better interest rates, efficient customer service, and lower repayments. But splitting a single property with two banks may not be possible.
How Many Times Can you Split My Home Loan?
Some lenders may allow you to split your loan up to four times. This gives you plenty of scopes to customise your rate structure.
Can I Use a Guarantor on a Split Home Loan?
Yes, you can have a guarantor help you buy a home with a split loan. In fact, with a guarantor, you may be allowed to borrow up to 105% loan-to-value ratio (LVR). This will help you cover other costs, such as stamp duty. In addition, some lenders may even waive Lenders Mortgage Insurance (LMI) if you have a guarantor.
Note: The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.