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Split vs fixed-rate mortgages: Which is right for you?

Bessie Hassan
·Money Expert at finder.com.au
·3-min read
Split vs fixed-rate mortgages: Which is right for you? Source: Getty
Split vs fixed-rate mortgages: Which is right for you? Source: Getty

With interest rates at record lows, it's never been cheaper to take out a mortgage. Finder offers rates as low as 1.90 per cent, but you may be able to find even lower ones if you know where to look.

But this low-rate market can make it hard to decide whether to stick to a variable loan or lock in your rate. Do you want the freedom and flexibility that a variable loan offers? Or should you opt for a guaranteed low rate for a set period of time? This is where a split loan can help.

A recent Finder survey revealed that 1 in 5 Aussies (20 per cent) would opt for a split loan if they refinanced, making it the most popular loan type. A split loan means you’re essentially splitting your mortgage into separate loans with different interest rates. You can choose to lock in a portion of your loan under a fixed rate and keep the remaining portion variable. This way, you can reap the benefits of a variable rate while enjoying the security that a fixed rate offers.

But just like any other type of mortgage product, split loans come with benefits and drawbacks that you’ll need to assess before making your decision.

Benefits of splitting your home loan

Enjoy both flexibility and certainty

Splitting your loan can bring peace of mind that a portion of your loan won’t be impacted if rates increase. On the other hand, you can also benefit from any future rate reductions.

Guaranteed repayments

Fixed-rate loans lock in your rate for a set period of time, meaning your rate and repayments won’t change. Fixing a portion of your loan offers certainty if you’re on a strict budget, and it reduces the full impact of any rate hikes.

Offset account and extra repayments

If the variable portion of your loan has an offset account and allows for extra repayments, you can use this extra cash to reduce your interest. This can help you to pay off your loan quicker.

Drawbacks of splitting your loan

Potential to pay more

Although the fixed portion of your split loan is protected from rate hikes, you also miss out on the benefit of any further rate reductions. Should interest rates drop further, you’ll be paying an unnecessary amount towards the fixed portion.

Multiple sets of fees

By splitting your mortgage into two separate loans, you may end up incurring multiple sets of fees, which can really add up. Fees may include establishment fees, break fees, early exit fees, lenders mortgage insurance (LMI) and more.

Complicated loan structure

Splitting your home loan multiple ways can get tricky. Having it all in a single account means you can easily track how much interest you’ve paid off. But the more splits you have, the more repayments and direct debits you’ll need to set up, which can get messy and complicated.

Deciding whether to split

Before choosing a home loan, take the time to consider the rate cycle. Choosing between a fixed, variable or split home loan will depend on how well you understand the cash rate movements and the impact that this can have on interest rates.

Not all institutions offer a split loan facility either, so you’ll need to confirm with your current lender whether this is a viable option. If you do decide to take the split loan route, make sure you’ve compared a variety of loans based on their interest rate, fees and features – you don’t want to take on an average loan product simply because it allows for splitting.

Bessie Hassan is a money expert at Finder.

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