Split Loan Strategies: Combining Fixed and Variable Rates

What is a Split Loan?

You know how difficult it can be to predict exactly what the Reserve Bank of Australia (RBA) will do next. A split loan strategy is the financial equivalent of not putting all your eggs in one basket.

We see many borrowers struggle with the choice between fixing their rate for security or staying variable for flexibility.

A split loan solves this by dividing your mortgage into two separate accounts under a single facility. One portion has a fixed interest rate, and the other has a variable rate. This structure allows you to lock in certainty for a portion of your debt while keeping the features that help you pay the loan off faster on the rest.

How Split Loans Work

This structure typically operates as two sub-accounts linked to the same property title. You generally pay a single annual package fee—often around $395 with major lenders—covering both loan portions rather than paying double the fees.

Example Structure

Let’s look at how this plays out with a $500,000 total loan:

• Fixed Portion: $250,000 locked at 5.89% for 3 years.
• Variable Portion: $250,000 variable at 6.19%.

Your monthly repayment is an aggregate of both. The fixed side remains constant regardless of market movement, while the variable side fluctuates if the RBA adjusts the cash rate.

Advantages of Splitting

Rate Protection You shield a percentage of your debt from rising interest rates. If the market jumps 1.00%, it only affects your variable portion, dampening the shock to your monthly household budget.

Flexibility Retained The variable portion is where you do your heavy lifting. Most variable loans allow unlimited extra repayments and access to a redraw facility, features often restricted on fixed loans.

Hedging Your Bets This is a risk management tool. By splitting, you aren’t gambling your entire financial position on a single interest rate outcome.

Budget Certainty (Partial) Knowing exactly what half your mortgage bill will look like for the next few years provides a stable foundation for financial planning.

Disadvantages of Splitting

Complexity You will have two loan account numbers to monitor. This requires tracking two different balances and ensuring you are maximizing the features of the variable side effectively.

Partial Benefits Compromise is inherent in this strategy. If rates plummet, you don’t get the full benefit because half your loan is locked high; if they soar, you still feel some pain on the variable side.

Break Cost Risks Breaking the fixed portion early can trigger “Economic Costs” or break fees. These are calculated based on the difference in wholesale swap rates and can cost thousands of dollars if you refinance or sell during the fixed term.

Potential Higher Cost Banks often price fixed rates based on future expectations. If the yield curve is inverted, fixed rates might be lower, but in normal markets, you might pay a premium for that security.

Common Split Ratios

The “right” ratio isn’t a formula. It is a reflection of your risk tolerance and cash flow needs.

Split (Fixed/Var)	Strategy Profile	Best For…
50/50	Balanced approach	Borrowers who want equal parts security and flexibility.
70/30	Rate protection priority	Tighter budgets that cannot absorb a large rate spike.
30/70	Flexibility priority	Borrowers planning to sell soon or expecting large cash inflows.
80/20	Maximum protection	highly risk-averse borrowers who just need a small offset facility.

When Split Loans Make Sense

Scenario 1: Uncertain Rate Outlook

When market economists are divided on the RBA’s next move, splitting provides a safety net.

Example: Sarah follows financial news but sees conflicting reports about inflation data. She isn’t comfortable betting her entire mortgage on rates dropping, nor does she want to lock in if they do fall. She splits 50/50. This ensures that no matter what the market does, she made the right call on at least half her debt.

Scenario 2: Budget Certainty + Flexibility

You might need fixed costs to sleep at night, but you also want to attack your principal.

Example: John earns a steady salary but receives a $20,000 performance bonus annually. Most fixed loans cap extra repayments at $10,000 per year. John splits 60% fixed and 40% variable. This keeps his base repayment stable while giving him a “bucket” (the variable loan) to dump his bonus into without penalty.

Scenario 3: Large Offset Balance

Offset accounts are powerful, but they generally only work on variable loans.

Example: Emma has $100,000 in savings and a $500,000 loan. If she fixes the whole loan, that $100,000 sits idle. Instead, she keeps $200,000 variable. Her savings now offset half of that variable portion, saving her roughly $6,190 in interest annually (at 6.19%), while the remaining $300,000 is fixed for stability.

Scenario 4: Risk Management

High-income earners in volatile industries often use this structure to safeguard cash flow.

Example: Mike works in mining contracting. His income is high, but contracts can end abruptly. He fixes 70% of his loan to ensure his core housing cost is predictable. He keeps 30% variable to maintain access to cash through a redraw facility if he faces an employment gap.

Deciding Your Split Ratio

Consider Your Priorities

You need to ask what matters more: predictability or potential savings?

• Rate protection priority: Lean towards 70-80% fixed.
• Flexibility priority: Lean towards 60-70% variable.
• Balanced: The classic 50/50 split is popular for a reason.

Factor in Your Offset Balance

Your variable portion acts as the container for your offset account.

• The Golden Rule: Your variable portion should be at least equal to your current savings plus the savings you expect to accumulate over the fixed term.
• Why it matters: If your variable loan is $50,000 but you have $80,000 in savings, that extra $30,000 isn’t saving you a cent in mortgage interest.

Consider Your Extra Repayment Plans

We always check the specific “extra repayment cap” in the lender’s product disclosure statement (PDS).

• The Cap: Major lenders like CBA, Westpac, and NAB typically limit extra repayments on fixed loans to $10,000 per year.
• The Strategy: If you plan to pay down $30,000 this year, ensure your variable portion is large enough to absorb that cash.

Think About Your Timeframe

Life changes can trigger expensive break costs on fixed loans.

• Selling or Refinancing: If you might move in 2 years, do not fix for 3 years.
• Renovating: If you need to access equity for a reno, a large fixed portion can make topping up your loan more difficult.

Split Loan with Investment Property

Investors use split strategies differently than owner-occupiers, primarily due to tax implications.

Tax Deductibility

Interest on both fixed and variable portions is generally tax-deductible in Australia if the funds are used for income-producing purposes. The split structure itself does not alter the deductibility.

Cash Flow Management

Investors often prefer the fixed portion to lock in certainty for their holding costs. Knowing exactly what the mortgage expense will be for 3 years makes it easier to manage rental yields and cash flow projections.

Offset Considerations

We usually recommend prioritizing offset accounts for your non-deductible debt (your home) first. Since the taxman effectively subsidises the interest on your investment loan, you get a better “after-tax” return by offsetting your home loan. Consequently, investment loans are often fixed at a higher percentage than home loans.

Managing Your Split Loan

Review at Fixed Term End

You must be proactive when your fixed term expires.

• The Revert Risk: Loans often roll over automatically to the lender’s standard variable rate, which is usually uncompetitive.
• The Action: Set a calendar reminder 30 days before expiry to negotiate a new split or rate.

Consider Rebalancing

Property values and personal finances change over time.

• Equity Release: If your property value has risen, you might refinance to release equity.
• Ratio Adjustment: If you have paid down the variable portion aggressively, your split might now be 90% fixed / 10% variable. You may need to “rebalance” to restore flexibility.

Track Both Portions

Management requires vigilance on two fronts.

• Variable Side: Watch for rate creep. Lenders sometimes hike variable rates for existing customers while offering lower rates to new ones.
• Fixed Side: Monitor your extra repayments to ensure you don’t breach the annual cap and incur penalties.

Split Loan Example Comparison

Let’s run the numbers on three strategies for a $500,000 loan over a single year.

Assumptions:

• Variable rate: 6.19%
• Fixed rate (2 year): 5.89%
• Market movement: Rates rise 0.50% halfway through the year.

All Variable

• Starting repayment: ~$3,059/month
• After rate rise: ~$3,204/month
• Annual interest: ~$32,000
• Result: You bear the full cost of the rate hike immediately.

All Fixed

• Repayment: ~$2,972/month (constant)
• Annual interest: ~$29,450
• Result: You save significantly on interest, but you cannot make large lump sum payments or use an offset account effectively.

50/50 Split

• Starting repayment: ~$3,016/month
• After rate rise: ~$3,088/month
• Annual interest: ~$30,725
• Result: Your repayment increase is dampened (only rising ~$72 instead of ~$145), and you retain the ability to offset half the loan balance.

Note: This is a simplified example for illustration. Actual figures depend on specific loan terms and days in the month.

Potential Pitfalls

Pitfall 1: Fixing at the Wrong Time

Timing the market is notoriously difficult. If you fix for 3 years just before the RBA starts a cutting cycle, you will be stuck paying a higher rate while everyone else enjoys cheaper mortgages.

Pitfall 2: Not Enough Variable for Offset

We see this mistake frequently. A borrower sets up a $50,000 variable split but keeps $60,000 in their offset account. The bank effectively ignores that excess $10,000, meaning you are paying unnecessary interest. Always allow a buffer in your variable portion for future savings growth.

Pitfall 3: Forgetting About Fixed Expiry

Lenders rarely call to offer you their best deal when your fixed rate ends. They let you roll onto a high “revert rate.” You must take the initiative to renegotiate or refinance as soon as the term ends.

Pitfall 4: Over-Complicating

Some borrowers try to create elaborate structures with three or four different splits. This rarely adds tangible value and simply increases your admin time. Simplicity is usually the superior strategy.

How We Help with Split Strategies

At AJ Home Loans, we view your mortgage as a tool to build wealth, not just a debt to be paid.

1. Assess your full situation: We analyze your income stability, upcoming expenses (like school fees or renovations), and savings trajectory.
2. Explain current rate environment: We provide data on the yield curve and RBA expectations so you understand why fixed rates are priced the way they are.
3. Recommend appropriate structure: We model different split ratios to show you exactly how changes in interest rates would impact your monthly cash flow.
4. Compare across lenders: Some banks allow 100% offset on fixed loans (like some smaller lenders), while others don’t. We find the policy that fits your needs.
5. Review when circumstances change: We stay in touch to adjust your strategy as your loan balance decreases or your financial goals shift.

Get Split Loan Advice

Choosing the right loan structure can save you thousands in interest and protect your lifestyle.

Book a free consultation to discuss whether a split loan suits your situation and what ratio makes sense for your goals.