How Does a Split Loan Work? A Guide for Melbourne Homebuyers

Buying a home in Melbourne is an exciting step, but choosing the right loan can make all the difference in your financial journey. Split home loans are a popular choice among homeowners who want a blend of stability and flexibility in their repayments. 

By combining both fixed and variable rates, split loans allow you to enjoy the best of both worlds.Mortgage brokers can be invaluable in this process, helping you tailor a split loan to fit your personal circumstances and future goals. 

Now, let’s dive into how split loans work and whether they might be the right fit for you.

What is a Split Loan?

A split loan, also known as a split rate home loan, allows you to divide your mortgage into two (or sometimes more) separate loan accounts. Typically, one portion of the loan is fixed while the other is on a variable interest rate. This approach gives you the best of both worlds—stability in your repayments with the fixed-rate portion and flexibility with the variable rate component.

How It Works

Fixed-Rate Portion

In the fixed-rate portion of your split loan, the interest rate is locked in for a set period, usually between 1 to 5 years. During this time, your monthly repayments remain unchanged, regardless of any fluctuations in the market. 

This can be particularly beneficial if you’re looking for repayment certainty and protection against potential interest rate rises. For example, if you’ve fixed 60% of your loan at a 5.75% rate, that portion of your repayments will stay the same throughout the fixed term, giving you peace of mind.

Variable-Rate Portion

The variable-rate portion, on the other hand, is tied to the lender's standard variable rate, which can change in line with movements in the official cash rate set by the Reserve Bank of Australia (RBA). 

This part of your loan is more flexible—allowing you to make extra repayments, access redraw facilities, or use an offset account to reduce your interest payments. However, because the rate can fluctuate, your repayments on this portion may go up or down over time.

How the Split Works in Practice

Let’s say you take out a $500,000 loan and decide to split it into two portions—$300,000 fixed at 5.5% and $200,000 variable at 5.25%. 

Over the fixed-rate period, your repayments on the fixed portion will remain stable, while the repayments on the variable portion may change depending on market conditions. 

If the RBA decides to lower the cash rate, your variable repayments could decrease, allowing you to pay off your loan faster or save on interest. Conversely, if rates rise, your repayments on the variable portion will increase.

Why Consider a Split Loan?

There are several reasons why a split loan might appeal to Melbourne homebuyers:

1. Balance Stability and Flexibility

Fixed-rate loans provide repayment certainty, protecting you from rate rises during the fixed-rate period. On the other hand, a variable loan offers the chance to make extra payments without penalty, potentially reducing your loan term.

2. Offset Accounts and Additional Features 

The variable rate portion often comes with additional features like offset accounts, which can reduce the interest you pay. 

3. Mitigate Risk During Economic Uncertainty 

With a split loan, you can hedge against economic uncertainty. If rates rise, your fixed-rate portion shields you from the full impact, while if rates drop, your variable portion allows you to benefit.

4. Tailor to Personal Circumstances 

A split loan can be structured to match your financial circumstances and goals, whether you're a first-time buyer, an investor, or refinancing your current home loan.

Real-World Example: Melbourne’s 2024 Property Market

As of 2024, Melbourne's property market continues to show resilience despite global economic pressures. According to the latest data from CoreLogic, the median house price in Melbourne is approximately $920,000. 

With variable rates ranging between 5.5% and 6%, many homeowners are considering split loans to manage their mortgage repayments effectively.

For example, Sarah and Mark, a young couple from the eastern suburbs of Melbourne, decided on a split loan for their $850,000 home. They locked in 70% of their loan at a 5.75% fixed rate for three years and left 30% on a 5.5% variable rate. 

This approach gave them peace of mind during uncertain economic conditions while allowing them to make additional payments on the variable portion.

How to Structure a Split Loan

When structuring a split loan, you’ll need to decide how much of your loan balance you want to fix and how much to leave on a variable rate. This decision depends on several factors:

• Your Financial Goals: Are you looking for repayment certainty or the flexibility to make extra payments? If you expect to make significant additional repayments, a larger variable portion might be beneficial.

• Interest Rate Forecasts: Consider the current economic environment and where rates might be headed. If rates are expected to rise, a larger fixed-rate portion could protect you from increasing repayments.

• Loan Term Considerations: The length of your loan term and fixed-rate period will also play a role. Generally, fixed terms range from 1 to 5 years, but you’ll need to plan for what happens when the fixed period ends.

• Offset Accounts and Other Features: Think about whether you’ll need access to features like an offset account, which is usually only available on the variable portion.

• Break Costs and Fees: Be aware that fixed-rate loans often come with break costs if you repay the loan early or refinance during the fixed period. Make sure you understand the potential fees associated with your split loan.

Smart Tips for Managing a Split Loan

Effectively managing a split loan takes some planning and ongoing attention, but with the right approach, you can make the most of this flexible loan type. Here are some smart tips to keep in mind:

1.Use a Split Loan Calculator: Before committing to a specific loan structure, use a split loan calculator to explore different scenarios. This tool helps you understand how various splits between fixed and variable rate loans will impact your repayments over the loan term. 

It's a great way to see how different loan amounts and loan interest rates affect your financial plan.

2.Regularly Review Your Loan Structure: It’s important to regularly assess how your split home loan is working for you, especially as the fixed-rate period of time comes to an end. 

Rate fluctuations can change your repayment type, so be prepared to adjust your strategy based on the current loan rate and your long-term financial goals.

3. Make Extra Payments on the Variable Component: If your split loan includes a variable rate loan, focus any additional payments on this portion. 

Since variable home loans often allow extra repayments without penalty, you can reduce your overall loan balance faster and potentially save on interest over time.

4. Monitor Rate Movements: Keep a close eye on economic indicators, especially the Reserve Bank of Australia’s (RBA) decisions on the official cash rate. These rate movements directly impact variable rate accounts and can cause changes in your repayments. 

Staying informed will help you anticipate any shifts in your repayment fee and overall loan package.

5. Work with a Mortgage Broker: Managing a split loan can be more straightforward with professional guidance. Mortgage loan specialists can provide insights into the different types of loans available and how to structure your split loan to best suit your financial circumstances. 

They can also help you compare different loan products, ensuring you get the most favourable comparison rate and avoiding potential break fees.

6. Check for Repayment Fees on Fixed Portions: When making additional payments, be mindful of repayment fees on the fixed portion of your loan. 

Not all split home loan products allow early repayments without incurring a fee, so it's crucial to understand your loan's terms to avoid unexpected costs.

7. Separate Your Accounts for Better Management: Consider setting up separate accounts for your fixed and variable components. This approach makes it easier to manage your repayments and monitor the performance of each part of your loan. It also helps you keep track of how much you owe on each loan type, making it simpler to adjust your strategy as needed.

FAQs

What is the main advantage of a split loan? 

The primary advantage of a split loan is the ability to balance repayment certainty with flexibility. You get the security of a fixed rate and the potential benefits of a variable rate.

Can I change the split between fixed and variable during the loan term? 

Generally, you can’t change the split ratio during the fixed-rate period without incurring break costs. Once the fixed term ends, you may have more flexibility.

Are split loans suitable for investment properties? 

Yes, split loans can be particularly advantageous for investors, offering both stability in repayments and the ability to make extra repayments on the variable portion.

What happens when the fixed-rate period ends?  

When the fixed-rate period ends, the fixed portion usually reverts to a variable rate unless you choose to refix it. It’s important to review your options before this happens.

Are there any fees associated with split loans? 

Yes, there can be fees, including break costs for the fixed-rate portion and application fees depending on the lender. Always check the loan’s terms and conditions.

How do I decide on the right split for my loan?  

The right split depends on your financial goals, current interest rates, and how much flexibility you need. Consulting with a mortgage broker can help you make an informed decision.

Can I have multiple splits in my home loan? 

Yes, some lenders allow you to split your loan into more than two portions, giving you even greater flexibility.

Final Thoughts

In a city like Melbourne, where the property market is ever-changing, a split loan offers a balanced approach to managing your mortgage. By combining the predictability of a fixed rate with the flexibility of a variable rate, you can tailor your home loan to fit your financial goals and circumstances. 

If you're considering a split loan or want to explore other mortgage options, getting the right advice is key. Contact Jacob Decru today at 0423 713 362 or click here to visit Jacob’s website to discuss your loan needs. With expert guidance, you can confidently choose the loan structure that's right for you and make the most of your home loan journey.