When and Why to Consider Splitting Your Loan Between Fixed and Variable Rates
Deciding between a fixed or variable interest rate is one of the most important decisions a borrower faces when taking out a home loan. Fixed rates provide stability and certainty, while variable rates offer flexibility and the potential to save if market rates fall. But what if you could have the best of both worlds?
For many Australian borrowers, splitting a home loan between fixed and variable portions offers the perfect balance— combining predictability with flexibility.
This guide explains when and why you should consider splitting your loan, how split loans work, the key advantages and disadvantages, and real-world examples where this approach can make sense.
What is a Split Loan?
A split loan divides your mortgage into two separate portions:
- Fixed-rate portion: A set portion of your loan is locked in at a fixed interest rate for a set period (usually one to five years), providing predictable repayments.
- Variable-rate portion: The remaining portion is subject to market interest rate movements, meaning repayments can go up or down.
For example, a borrower with a $500,000 mortgage might fix $300,000 at 5.5% and leave $200,000 on a variable rate at 5.0%. This split allows you to combine the stability of fixed repayments with the flexibility to benefit from rate cuts or make extra repayments on the variable portion.
When Should You Consider Splitting Your Loan?
Split loans are especially useful in certain situations. Here’s when you might want to consider one.
1. In an Uncertain Interest Rate Environment
If the Reserve Bank of Australia (RBA) is adjusting the cash rate but future trends are unclear, splitting your loan can help manage risk. You protect part of your loan from rising rates, while the variable portion lets you benefit if rates drop.
2. When You Need Budget Stability
First-time buyers or borrowers with tight budgets often want predictable repayments. By fixing part of the loan, they gain stability for household budgeting, while keeping some flexibility to manage extra repayments or short-term goals.
3. When You Want Flexibility for Life Changes
If you expect changes like a pay rise, inheritance, or a bonus, the variable portion allows you to make additional repayments or access redraw facilities without penalty — something not usually available on fixed-rate loans.
4. To Balance Long-Term and Short-Term Goals
Borrowers planning to sell or refinance within a few years may not want to lock the entire loan into a fixed rate. A split loan allows you to manage both short-term flexibility and long-term stability.
5. To Hedge Against Market Movements
Splitting your loan is effectively a hedge. If rates rise, the fixed portion protects you. If rates fall, the variable portion allows you to benefit.
Advantages of Splitting Your Loan
Predictability with Flexibility
The fixed portion offers consistent repayments, making budgeting easier. The variable portion allows you to make extra repayments, access redraws, or benefit if rates drop.
Reduced Risk
Splitting lowers your exposure to rate changes. If rates rise, the fixed portion limits your repayment increases. If rates fall, the variable portion reduces your overall repayment burden.
Access to Loan Features
Variable portions typically come with useful features like offset accounts and redraw facilities, which can help lower interest and increase financial flexibility.
Customisation
You can tailor the split to fit your goals:
- 50/50 split: Equal balance between fixed and variable.
- 70/30 split: More stability with a larger fixed portion.
- 30/70 split: More flexibility with a larger variable portion.
Disadvantages of Splitting Your Loan
Added Complexity
You’ll need to track two portions of your mortgage, each with different rates and rules. This can make managing your repayments more complicated.
Limited Flexibility on the Fixed Portion
The fixed portion often has restrictions, such as limits on extra repayments, no redraw, or no offset account, which may limit your ability to reduce interest costs.
Break Fees
If you refinance or sell your home before the fixed term ends, you may face substantial break fees on the fixed portion. This can reduce your ability to adjust your loan as circumstances change.
Missed Savings if Rates Fall
If interest rates drop sharply, the fixed portion will remain locked at a higher rate, potentially making your loan more expensive compared to an all-variable loan.
How Does a Split Loan Work?
Splitting a loan involves the following steps:
- Consult with Your Lender or Broker
Discuss your options and decide if a split loan suits your financial goals. - Determine the Split Ratio
Choose how much of your loan to fix and how much to leave variable. This could be 50/50, 70/30, or any ratio that suits your situation. - Set Fixed Terms
Decide the length of the fixed portion, typically between one and five years. After the term ends, this portion usually reverts to the lender’s variable rate. - Manage Repayments
Although the loan is split internally, repayments are typically bundled into a single monthly payment, making day-to-day management straightforward.
Real-World Examples
Scenario 1: First-Time Buyers Seeking Stability
Alex and Sarah purchase a home with a $600,000 mortgage. They split the loan 70/30:
- Fixed: $420,000 at 5.5% for three years
- Variable: $180,000 at 5.0%
This setup gives them stable repayments on the majority of the loan while allowing flexibility to make extra repayments or access redraws on the variable portion.
Scenario 2: Investors Managing Cash Flow
Mark, an investor, has an $800,000 loan. He splits it 50/50:
- Fixed: $400,000 at 5.7% for five years
- Variable: $400,000 at 5.3%
The fixed portion gives him repayment certainty to manage rental income, while the variable portion lets him use offset savings to reduce interest.
Scenario 3: Hedging in a Volatile Market
Priya has a $500,000 mortgage and is concerned about rising rates but doesn’t want to miss out if rates fall. She chooses a 60/40 split:
- Fixed: $300,000 at 5.6% for four years
- Variable: $200,000 at 5.2%
This balances risk protection with potential savings, giving her confidence to navigate market shifts.
Tips for Managing a Split Loan
- Understand the Terms
Be clear on the fixed portion’s limits, including extra repayment caps and break fees. - Monitor Interest Rates
Keep an eye on market movements to decide when to refinance or adjust your loan when the fixed term ends. - Budget for Changes
Be prepared for the fixed portion to roll over to a variable rate after the term ends, which may increase repayments. - Consult a Mortgage Broker
A broker can help tailor the split ratio and recommend lenders with competitive offers.
Is a Split Loan Right for You?
A split loan can be an excellent option for:
- Borrowers wanting to balance stability and flexibility
- First-time buyers needing budgeting certainty
- Investors managing cash flow and tax-deductible debt
- Homeowners hedging against unpredictable market conditions
However, it’s important to weigh the benefits against the potential drawbacks, such as limited flexibility on the fixed portion, possible break fees, and added complexity.
Final Thoughts
Splitting your home loan between fixed and variable rates offers a smart middle ground for many Australian borrowers. It allows you to enjoy the stability of fixed repayments while keeping the flexibility to respond to changing circumstances.
Before making a decision, carefully consider:
- Your financial goals
- Your tolerance for risk
- Current and forecasted market conditions
Working with a mortgage broker or financial advisor can help you design the right split and navigate lender options to secure the best deal.
