Split Mortgage

Torn between a fixed or variable home loan? Why not have both? A split mortgage gives you the best of both worlds, allowing you to lock in a stable rate for security while keeping a flexible portion to take advantage of potential savings. Whether you’re after rate stability, repayment flexibility, or the chance to save more, splitting your loan could be a smart move. Keep reading to discover how it works, its benefits, and how you can structure the right split for your mortgage.

What Is A Split Mortgage?

A split mortgage, or a split home loan, is a structure that divides your home loan into two or more portions, typically, one portion has a fixed interest rate and another has a variable rate. For example, you might fix 50% of your loan at one rate, while keeping the remaining 50% at a variable rate.

The fixed component 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 the lender allows it.

How Does A Split Mortgage Work?

A split mortgage divides your loan into separate accounts, each with its own interest rate, allowing you to manage both stability and flexibility in one loan. Your repayments are calculated individually for each portion, based on its respective rate.

The fixed portion provides certainty, as the interest rate remains unchanged for a set period. This is usually one, three, or five years. This means your repayments stay the same, regardless of market fluctuations. Once the fixed term ends, this portion reverts to a variable rate.

The variable portion fluctuates with market rates, which means your repayments can increase if rates rise but may also decrease if they fall. This portion also offers flexibility, allowing you to make unlimited extra repayments, use an offset account, and potentially reduce interest costs.

Here’s a practical example of how a split mortgage might work:

Let’s say that you borrowed $500,000 over a 30-year term, fixed $300,000 at 5.55% a year, for three years, and kept the remaining $200,000 variable at 5.88%.

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.

What Are The Benefits Of A Split Rate Home Loan?

By splitting your home loan in two, one part fixed the other variable, you can enjoy the benefits of both sides while lessening the risk and effect of 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 rates.
• Flexibility: The variable component is the more risky side, since there is a chance of an interest-rate rise; however, the flexibility of this portion allows you to take advantage of potential decreases in interest rates.
• Competitive rates: You can get a competitive interest rate, which can be secured with the fixed rate, while retaining 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 more quickly.
• Offset: 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 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 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 portions.
• You may be charged a break cost on the fixed portion if you pay out the mortgage early.

How Do I Apply For A Split Mortgage?

Applying for a split mortgage is similar to applying for a standard home loan, except you’ll specify upfront that you’d like to divide your loan into separate portions.

When applying, you’ll discuss with your lender or mortgage broker the amount you’d like allocated to each fixed and variable portion and the specific terms. Once you choose your preferred loan structure, these separate accounts will be clearly detailed within your overall home loan contract.

Keep in mind that a split loan isn’t a separate loan by itself but a feature that is included in a loan package when you apply for a home loan.