Mortgage Split 101: What It Is, How It Works, Savings, and More!

Mortgage split means structuring a home loan into two parts, accommodating both a fixed and variable interest rate.

Since buying a home is one of the biggest financial decisions you will ever make, choosing the right mortgage structure plays a massive role in how manageable (or stressful) your loan experience will be. 

Failing to make it manageable puts you at risk of mortgage stress, which makes your decision a high-value one if you’re seeking to own a home.

By dividing your mortgage into separate parts, a loan split gives you greater flexibility with a combination of fixed and variable rate components, and the potential to save thousands of dollars over the life of your loan.

What Is a Mortgage Split?

A split home loan (or a combo loan) is a mortgage structure that divides your loan into two or more parts, assigning a portion of the loan to have a fixed interest rate and the remainder to have a variable interest rate.

For instance, you can choose to split your loan into:

• A fixed-rate portion: This part of the loan has a locked-in interest rate for a set period (typically 1 to 5 years), offering protection from market rate changes.

• A variable-rate portion: This part has a rate that fluctuates with the market, potentially giving you access to features like an offset account, redraw facility, and extra repayments. It could also help you save money if the market rate drops.

Essentially, a loan split combines the security of a fixed rate with the flexibility of a variable rate.

How Does a Loan Split Work?

Let’s say you take out a $600,000 home loan. You could split it like this:

• 60% fixed rate ($360,000): This portion has a fixed interest rate of 5.5% for 3 years.

• 40% variable rate ($240,000): This portion has a variable rate of 5.2% that can change over time.

If the interest rates do rise, you don’t have to worry about the change for 60% of your loan. Meanwhile, if the rates decrease, the 40% of your loan will benefit from it. 

Each portion is treated separately in terms of interest rates, repayments, and features. But together, they form a single loan. 

There is no set rule on how you split your loan. Your lender may let you choose how to divide the loan (50/50, 70/30, etc.), depending on what suits your financial strategy and risk tolerance. 

But the ideal mortgage split comes down to your financial needs and personal circumstances. You should discuss your financial situation, plans, and risk level with a broker or financial advisor to determine which rate is right for you.

What Happens at the End of the Fixed Term?

When the fixed-rate portion of your split loan ends, it typically reverts to your lender’s standard variable rate, which could mean higher or lower repayments depending on the market. 

This is a good opportunity to review your loan and consider whether you want to fix the rate again, adjust your split ratio, or even refinance with a different lender. 

The good news is that once the fixed term ends, break fees no longer apply, giving you more flexibility to make changes without extra costs.

Identify the Right Split Ratio

We can help you:

• Find the perfect mortgage solution that suits your needs.

• Identify the right mortgage split ratio.

• And guide you through the mortgage process from start to finish.

The best part? All of this is FREE!

As a licenced mortgage broker that’s legally bound by ASIC’s Best Interests Duty, we guarantee to find you the most suitable solution that fits your unique needs and goals. 

And with our extensive panel of 30+ top lenders and 2,000+ mortgage solutions in Australia, you can unlock opportunities that you might miss otherwise. 

Interested? Contact us to get your dedicated mortgage advisor for free today!

3 Ways a Mortgage Split Can Save You Money

When interest rates are volatile, a split loan can act as a hedge. You’re not putting all your eggs in one basket. By strategically balancing fixed and variable rates, you can:

1. Protect Yourself Against Rising Interest Rates

When the RBA hikes rates, only your variable portion is affected, while your fixed rate stays locked in. 

For example, on a $500,000 loan, a 2% rate rise would typically cost $583 more per month on a full variable loan. With a 50/50 split, you'd only feel half that impact ($291).

2. Capitalise on Rate Drops

If interest rates fall, your variable portion automatically benefits, unlike fixed rates that stay locked. 

In 2020-2021, variable rates dropped to record lows, and split loan holders saved without refinancing. So you maintain some flexibility to benefit from future cuts.

3. Optimise Extra Repayments

Most fixed loans limit extra repayments. With a split loan, you can:

• Make unlimited extra payments on your variable portion.

• Reduce interest costs faster without penalty.

• Park savings in the offset to reduce interest on the variable portion.

According to Moneysmart, even small extra repayments or offset savings can shave years off your loan term and save thousands in interest.

So while a split loan might not always save money (no loan structure guarantees this), it gives you the tools to adapt as market conditions change.

Availability of unlimited extra repayments and offset accounts depends on your lender. Many (but not all) lenders offer these features, so be sure to double-check with your lender or broker.

Why (And Why Not) a Loan Split Might Work for You

You might be wondering how a mortgage split can be so beneficial. It’s not all good, because it too comes with a set of downsides. So, this is where you’ll learn the pros and cons of a split mortgage.

Pros:

• Rate protection: The fixed portion shields you from rising interest rates.

• Access to features: The variable side often includes redraw, offset, and extra repayment options.

• Flexibility & stability: You get predictable repayments on one side and repayment freedom on the other.

• Customisable: You can choose the split ratio that best suits your needs and financial strategy.

• Potential savings: Using the variable side smartly can help you reduce interest and pay off your loan faster.

Cons:

• Break costs: Paying off or refinancing the fixed portion early may trigger costly break fees, which can cancel out any savings you were aiming for.

• Limited features on the fixed side: Most lenders don’t offer offset, redraw facilities, or extra repayments on fixed loans.

• More complex to manage: You’ll be dealing with two sets of terms, interest rates, and possibly repayment schedules, which makes budgeting difficult.

• Not always cheaper: If the fixed rate is high or the market doesn’t move in your favour, the structure might not offer significant savings.

When Is a Mortgage Split a Good Idea?

A split mortgage might work well if:

• You want certainty over part of your repayments, but still want the flexibility to make extra repayments or access redraw.

• You expect interest rates to rise, but want to safeguard your bets.

• You’re unsure whether fixed or variable is better, and want to test both.

It’s a strategy especially suited for potential/existing mortgage owners who want to manage cash flow and access features like redraw.

Who Might Want to Think Twice When Getting a Split Mortgage?

This approach may not be ideal if you:

• Prefer absolute simplicity in your finances.

• Want to maximise features like full offset accounts.

• Expect to sell or refinance soon (due to break costs).

• Are comfortable with full variable risk for potential savings.

Tip: Use the RBA’s cash rate tracker to understand recent trends before deciding.

Things to Consider When Going for a Mortgage Split

1. Understand the features: Check which part of your split loan has access to offset, redraw, or extra repayments.

2. Watch out for break fees: If you plan to refinance or sell your property within the fixed term, calculate potential exit costs.

3. Choose the right split ratio: There’s no one-size-fits-all. Talk to your mortgage broker or financial advisor about a balance that suits your goals and risk comfort.

4. Review regularly: Once the fixed term ends, revisit your split structure. You may want to re-fix, go fully variable, or adjust the ratio.

Consider the features you want to enjoy, from flexibility to fees, and make a decision based on your personal and financial circumstances, as in your needs, capabilities, and limitations.

Some of the fees you have to take into account are establishment fees, Lender’s Mortgage Insurance (LMI), ongoing fees, breaking fees, early exit fees, mortgage discharge fees, and refinancing fees.

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