Types of Home Loans: Split loans
What is a Split Home Loan?
A split loan refers to a loan where a percentage of the loan is fixed, and a percentage of the loan is variable. In most instances, this is under the banks ‘Package’ or ‘Professional’ product, which generally attracts an annual fee, an offset account, and a Credit Card.
There is seldom a benefit to taking a fixed only loan unless the repayments (including interest & ongoing fees) are lower. Assuming you are under a Packaged product that allows splits, it is usually worth keeping at least a small portion of the loan variable.
The benefits of a split loan are:
- You receive the advantages of a fixed rate loan, whilst being enabling an offset account. While offset accounts don’t generally apply to fixed rate loans, they are available on the variable portion of a split loan.
- It’s a tool to hedge your bets. If you’re unsure where rates are going, but don’t want to fix your whole loan, you can fix a portion to reduce the fluctuations in your repayments.
- The fixed portion can usually be fixed for 1 – 5 years.
- You can split the loan anyway you like, for example: 95% fixed 2 years + 5% variable; or, 50% fixed 4 years + 50% variable, etc.
What split should you go for?
You can split the loan anyway you want, and there’s no correct answer. Common splits include:
- 80% fixed + 20% variable.
- 50% fixed + 50% variable.
- 95% fixed + 5% variable.
A few guidelines to help you decide:
- Only the variable split will work with an offset account. As such, ensure your variable portion is higher than your expected savings balance.
- The higher the fixed split, the less your repayments will fluctuate.
- Pricing discounts during the period are only applicable to the variable rate.
How you can get more out of your split loan?
Most split loans also give you a waiver on the lender’s high rewards Credit Card. If this is the case, you should consider taking advantage by:
- Opening a Credit Card account with suitable rewards, $0 fee and 0% interest for 30+ days (your Broker can usually set this up with the home loan application).
- Putting the majority of your purchases on the Credit Card – thus giving you the rewards points.
- Paying the Credit Card off in full every 30 days – thereby ensuring you pay no interest or fees.
Assuming you keep your savings in your offset account, and pay the Card from there each month, you’ll be able to keep your offset balance higher and save on interest. This works because offset account savings are calculated daily (although they are added to your statement monthly).
Split Home Loan FAQ:
How do you setup a split loan?
You just need to discuss with your Broker/Banker how you would like to split the loan, and they will set it up for you.
Can you split your existing loan?
Yes - you just need to discuss with your Broker/Banker about getting a loan variation.
Can you split your loan multiple times?
Most banks will allow this. Theoretically you could split $100k fixed 1 year + $200k fixed 2 years + $200k variable - or something like that.
Are there any fees involved with splitting your loan?
Usually not. Split loans are generally only available under packaged loans though, which usually have an annual fee of $250 - $400.
Can I later combine a split loan?
Yes - you can do this through a variation at your current bank or by refinancing internally/elsewhere.
Can I get an offset account?
As most split loans come under a packaged loan, it will usually include an offset account. This will only work against the variable split.