Split home loans, and how to work out the proportions that suit you

The short answer

A split loan is one loan against one property, with the balance separated into portions that are priced differently. One portion is fixed for an agreed term and the other stays variable.

The protection it gives you is partial by design. Whatever happens to variable rates reaches only the variable portion, so you are neither fully sheltered from a rise nor fully exposed to one.

That is the honest description of a split, and it is also the reason people choose it. It is a way of not having to be right about something nobody could be reliably right about.

How a split loan is put together

The paperwork is one loan, one property and one application. Inside it, the balance sits in separate portions, and each has its own rate, its own repayment and its own terms.

1. 1

   The total is settled first

   How much you could borrow is assessed the way it would be for any home loan, against your income, your commitments and the security. Splitting comes after that, and it does not usually change what a lender is prepared to advance.

2. 2

   The balance is divided

   You nominate the proportions and the lender sets the loan up accordingly. Lenders differ on whether they charge to create a split and on how many portions they allow, so this is a question to ask before the loan is written rather than afterwards.

3. 3

   Each portion is priced separately

   The fixed portion takes a fixed rate for the term you choose, and the variable portion takes the lender's variable rate for that product. The two prices are unrelated to each other, and both are set by the lender.

4. 4

   You repay both

   Each portion carries its own repayment, and many lenders present them together or draw them from the same account on the same day. Features attach to the portion they belong to rather than to the loan as a whole.

5. 5

   The fixed term ends

   That portion then reverts to a variable rate the lender sets, and the loan sits wholly on variable rates until somebody does something about it. The revert is not automatically competitive, which is why the expiry date belongs in a diary.

None of that is difficult to live with once it is running. The work sits in the decision made before it, which is the proportions.

Splitting a loan you already have

All of the above describes a loan being written for the first time, which is not how most people arrive at the question. Splitting a loan you already hold starts with the product rather than with the request, because not every loan allows it.

Where the product does allow it, many lenders could set the split up as a variation to the existing loan. Where it does not, the choices narrow to asking that lender for an exception, which it is under no obligation to grant, or refinancing to a loan that allows splitting. That last one is a full application, so it is worth costing against what the split would actually achieve before you start it.

Deciding how much of the loan to fix

Splits are commonly set in whatever proportion suits the borrower, and no ratio is correct in the abstract. The right proportion depends on your income, your budget and what you intend to do with the loan.

The most defensible way to reach a number is to start from the budget rather than from a view on rates. Work out the repayment your household would have to keep paying through a difficult year, then size the fixed portion so that repayment is the part that holds still.

Then check the answer from the other end. Offset and unrestricted extra repayments live on the variable portion, so it has to be large enough to absorb the money you genuinely intend to put against the loan.

• Work out the repayment your budget has to survive, not the one you would like to make
• Size the fixed portion so that repayment is the part that cannot move
• Size the variable portion around the balance you actually hold and the extra you actually pay in
• Ask whether the lender charges to create or restructure a split, and how many portions it allows
• Read what the fixed portion allows in extra repayments before assuming you could pay it down
• Note the date the fixed portion expires, and what it reverts to, before you sign anything

A variable portion so small that the offset has nothing to work against is doing half a job. A fixed portion so small that it covers only what the budget could absorb anyway is doing the other half.

Running the arithmetic on your own figures is the only way to see the trade-off properly, and it is worth an hour before you commit rather than a shrug at the branch. Two tools on this site do it: /finance-calculators/split-loan-calculator/ works a split at proportions you choose, and /finance-calculators/fixed-vs-variable-rate-calculator/ shows what each rate type does to a repayment on either side of the decision.

What each portion gives you, and what it gives up

The two halves behave exactly like the loans they are named after, and that is the useful thing about the structure. Nothing new is invented, so whatever applies to a fixed loan applies to the fixed portion.

The row that catches people out most often is extra repayments. A household planning to attack the loan hard commonly finds the fixed portion is the part getting in the way, which is an argument for sizing it deliberately rather than for avoiding a split altogether.

Fixed against variable is argued properly in its own right at /guides/home-loan-types-guide/, and how an offset differs from redraw is set out at /guides/offset-vs-redraw/. This page takes both as read and concentrates on the split itself.

What to be wary of

A split is a sensible structure and it is frequently sold as a clever one. The list below is what the sales version leaves out.

• It reduces your exposure rather than removing it, so a rise still reaches part of the balance
• Break costs could apply to the fixed portion if you exit it early, and selling could trigger them
• Extra repayments are commonly capped on the fixed portion, which matters if paying down fast is the plan
• An offset generally reduces variable borrowing only, so the variable side has to be big enough to matter
• Some lenders charge to create or restructure a split, and lenders differ on how many portions they allow
• Redraw is commonly restricted or unavailable on a portion while it is fixed
• When the fixed portion reverts, the rate it reverts to is set by the lender and is not automatically competitive

None of this makes a split a poor structure. It makes it a structure with a fixed loan inside it, which is a narrower point and a more useful one.

Who a split tends to suit, and where to go next

A split tends to suit a household that needs part of its repayment to hold still and needs the rest of the loan to stay usable. That is a narrower description than the best of both worlds, and a more honest one.

• One income is steady and the other moves with bonus, commission or hours
• The budget could absorb some movement in the repayment, but not movement on the whole balance
• You intend to pay extra, though not against every dollar you owe
• You are coming off a fixed term and are not confident about fixing the lot again
• You have been told to fix by one person and to stay variable by another

It suits nobody looking for a way to be right about rates, because there is no such structure. It also suits nobody likely to sell or restructure during the fixed term, for the same reason a fixed loan does not.

If the structure sounds like your situation, the next step is arithmetic rather than opinion. Take your own loan amount and your own budget to the calculators below, then talk the proportions through with somebody who could tell you what each lender allows.