Splitting your home loan

Your home loan is one of the biggest financial commitments you’ll ever make. Some people prefer to set it up in a way that gives them:

• Some protection when rates move up or down
• Fewer large refixes at once
• Some certainty about their monthly budget
• Breathing room to make extra repayments.

A good home loan structure isn’t about guessing where rates will go. For many customers it’s about having options, no matter what happens.

That’s where splitting your home loan could make a real difference.

Think of splitting your home loan like dividing a big job into smaller, more manageable pieces. Instead of having one big loan all on the same rate and term, you break it into separate loans.

For example, you might choose to:

• Fix one portion for one year
• Fix another portion for a longer term e.g. two or three years
• Leave a small portion floating so you can repay it whenever you like.

Each chunk has its own rate and term, so they don’t all change at the same time – which could give you more flexibility and control.

Like diversifying your investments, splitting your home loan could make the ups and downs of interest rates feel less stressful. It might help you:

• Avoid having your whole loan refix at once
• Smooth out the impact of rates moving up or down
• Take advantage of different rates at different times
• Have the flexibility to pay extra when you can on any floating or flexi portions.

When you take out a home loan, you can choose the type of loan or type of rate you want. Splitting your loan means you can combine more than one option to suit your needs.

Here’s a rundown of the main types:

Fixed rate loans work well if you like certainty, as your repayments stay the same for the term you choose. You can lock in a new fixed rate up to 60 days before your fixed rate period ends—.

With a fixed loan, you’re limited on how much extra you can repay during the term. That’s why many people choose to split their loan between fixed and floating portions.

Floating rate loans are more flexible. You make regular home loan repayments, just like with a fixed rate loan, but the rate and your repayments, can move up or down with the market.

There are no penalties for extra repayments, so you can increase your repayments, make lump sum payments, or pay down this portion whenever you choose.

A flexible home loan works like a transaction account with an overdraft, or in other words a revolving credit facility. Your income can go into the Flexible Home Loan account to lower the current loan amount, and if your spending comes out of the same account, then you may only pay interest on the remaining outstanding balance. There are no set repayments so you may need more discipline with this loan type. It is especially handy if you normally keep money in your accounts, because your unused income can help reduce the interest you pay.

When you split your loan, you can mix these options to get the right balance of certainty and flexibility for your life.

A home loan structure isn’t one size fits all. The best setup is one that suits your lifestyle, your goals, and how you like to manage your money.

Many borrowers choose to split their loan across different fixed-rate terms rather than placing large portions on floating. This could help spread refix dates and better manage interest rate risk, while still allowing some flexibility depending on how the loan is structured.

Here are three common approaches to help you think about what might work for you:

If you want a mix of stability and flexibility and want to spread your interest rate risk, it might look like this:

• 40% of the loan fixed for a longer term, for example, a two or three-year term
• 40% of the loan fixed for a shorter term, like one year
• 20% of the loan on floating.

This might spread out refix dates, providing different interest rate options, while still giving room to make extra repayments. You might have different proportions that work best for you to keep a balance of stability and flexibility, which many borrowers often prefer.

If you prefer predictable repayments but want to retain some flexibility for extra repayments, an example could be:

• 80% fixed for a longer term, like three or five years
• 20% floating or flexible.

In this example, most of the loan stays steady, but still has a little flexibility. A smaller floating or flexible portion allows extra repayments. A flexible loan with available credit might provide the ability to manage short-term cash flows, if needed.

This approach might suit borrowers who value repayment certainty and want protection from potential interest rate changes over a longer period.

If you want even more freedom to make extra repayments an example could be:

• 60% fixed for a shorter term, like one year
• 40% floating or flexible.

This could give more freedom to pay down a loan faster when possible.

Splitting your home loan can work well for some customers, but it may not be the best option for everyone. For example, if you prefer the simplicity of having one rate and one repayment, or you expect to make large lump sum repayments soon (which could trigger break costs on the parts of your home loan that are fixed), a split structure may not be the best fit.

A split structure may also be less suitable for customers with smaller loan balances, or for those who rely on full flexibility through tools like revolving credit.

For some customers, fixing for a longer time might give more certainty, but means that they can’t take advantage of rates moving down as quickly.

A good home loan structure should feel like it supports your goals.

Many people like the stability of knowing part of their loan won’t change for a while, so they can make long-term plans for their money. Others also like to keep a portion flexible so they can use bonuses, savings, or extra income to pay the loan down faster.

Think about:

• How steady your income is
• Whether you want to make extra repayments
• How long you plan to stay in the property
• How comfortable you are with rate changes, up or down
• What your long-term financial plans look like.

Once you’re clear on those things, choosing a structure could become much easier.

You don’t need to predict interest rates. You just need a loan structure that helps give you confidence and suits your goals.