UNO home loans
4th November 2023
Split home loan Australia: what are the benefits of a split home loan?
With RBA raising interest rates to a decade-high of 4.10%, taking time to consider the structure and type of your home loan could save you thousands of dollars.
A split loan is when you divide a mortgage into separate parts, giving you greater flexibility with a combination of fixed and variable rate components.
In this article, we uncover how split loans work and the benefits of a split home loan.
- A split loan divides your loan into multiple parts with a combination of fixed and variable rates.
- Variable rates change over time in line with RBA interest rates while fixed rates are locked for a certain period.
- The benefits of splitting a mortgage include flexibility and tolerance to interest rate changes.
- There is no set number, but common split ratios vary, but can include 50:50, 60:40 or 80:20.
- It is possible to refinance a split home loan - A UNO Broker can help you do this.
What is a split home loan? How does a split loan work?
A split loan or 'combo loan' is dividing your loan into parts. You might put one portion of your loan on a fixed variable rate and the rest at a variable rate.
It is important to remember variable rates fluctuate over time while fixed rates are locked for a set period.
With a split loan, you can get a combination of fixed and variable rates.
In most cases, you can choose to allocate your split however you like, provided you meet the minimum loan amount set by your lender. For example, you could opt for a 10% fixed rate with a 90% variable rate.
What are the benefits of a split loan?
Navigating fixed and variable rates
'Should I fix my home loan rate' is a common question as interest rates fluctuate.
There are many pros and cons with fixed and variable home loans which can make deciding tricky. A split home loan gives you the best of both options by locking a portion of your home loan and leaving the other at a variable rate.
A split loan could help offer flexibility, save time, and minimise the risks of drastic repayment changes.
Many lenders offer fixed rate options, such as fixing your interest rate for 1-5 years or 1-3 years. This can be an attractive option for homeowners if interest rates are increasing.
But the opposite might be true if interest rates are set to decrease. In this case, fixed interest rates don't give you the flexibility that variable rates do.
Variable rates often come with many additional features. They can give you the ability to make extra repayments or access an offset account.
Split loans can help manage risk
Diversification is often key in finance. Splitting your loan could help you navigate the risks of interest rate changes.
The cash rate in October 2023 is 4.10%, up from 2.6% in October 2022.
This represents an extra $400 a month in repayments for an average 30-year mortgage - or $200 if half your loan is split on a fixed rate.
Splitting a home loan could help curve the impact of future interest rate changes, potentially saving you thousands in interest. The difference illustrated above, for example, equates to about $150,000 across the life of a loan*.
They could also offer stability by making it easier to budget for the fixed component of the loan.
What are the disadvantages of splitting a home loan?
There are advantages to a split home loan, but there are also drawbacks including:
- Fluctuating repayments - If a portion of your home loan is variable, your monthly repayments might change if interest rates vary. This could make budgeting harder.
- Interest rate changes - If interest rates increase, your variable loan portion will increase. Conversely, an interest rate drop might mean you don't fully benefit if your fixed rate portion remains steady.
- Fees - Lenders charge fees and having two loan products could result in different fees. Some loans also have break fees if you want to leave a loan early. A UNO Broker can help you navigate fees.
What is a good split loan ratio?
There is no typical rate, but common split loan ratios include 50:50, 60:40 or 80:20 two-ways with a fixed and variable rate.
In most cases, you can choose to split your loan however you like, provided you meet your lender's minimum loan amount. Some lenders won't allow more than two splits, but a UNO Broker can help find the best option for you.
The 'ideal' split comes down to your financial needs and personal circumstances. You should discuss your financial situation, plans, and risk level with your broker to determine which rate is right for you.
There are many potential splits. For example, you could opt for a 10% fixed rate with a 90% variable rate; or 50% fixed and 50% variable. If you are looking to borrow $500,000 in total, splitting 50% fixed and 50% variable would mean you are borrowing $250,000 on the fixed rate product and $250,000 on the variable rate product.
Can you refinance a split loan?
Yes, you can refinance a split loan. The process may involve a bit more paperwork if there are two loans, but working with a mortgage broker can make this process easier.
A UNO Broker can help you refinance your split loan while giving guidance on navigating different split structures and loan options.
Talk to a UNO Broker today.
Making extra repayments on a split loan
Fixed interest rate products often have restrictions on the amount of extra repayments you can make per year or during the fixed rate period without incurring a penalty (often known as a ‘break cost’ or ‘prepayment fee’).
The amount allowable will vary from lender to lender but, generally, a fixed rate product will allow you to make up to $10,000 per year without penalty. That means fixing your whole loan may restrict you in only making up to $192.30 each week in extra repayments.
If you intend to add an additional $1500 to your minimum monthly repayments (or $18,000 in extra repayments per year), then fixing 100% of your loan will not give you that flexibility.
Split rate home loans: the bottom line
You get the best of both with a split rate home loan. But nothing is perfect.
Splitting your loan into fixed and variable portions is a great way to provide flexibility. It can lower the risk of exposure to interest rate changes and repayment hikes. The variable component can enable to access mortgage features not typically avalible on a soley fixed rate.
Equally, split loans can also be beneficial in the event of interest rates dropping. If you have a fixed rate and interest rates fall, you are locked into your rate and simply cannot capitalise on the option to make less in repayments.
However, if part of your loan is variable, then you can still benefit from the decrease in interest rate on the variable portion, paying less in repayments and interest.
Wondering whether to go fixed or variable? A combination of the two could be the answer you're looking for. Talk to a UNO Broker today to discuss your options.
Further reading
*$600,000 30-year loan 2.85% vs 4.10% assuming no introductory offers or differences in loan beyond rate. For illustrative purposes only.