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Split loans: hedging when rates are uncertain

A split loan divides your borrowing into two or more portions, each with its own rate structure. The most common split is fixed + variable - you get some rate certainty plus the flexibility of offset and extra repayments.

Why split at all

A 100% variable loan exposes you to rate rises. A 100% fixed loan traps you with break costs if rates fall. A split gives you optionality in both directions, at the cost of some added complexity.

The 50/50 default isn’t always right

Advisers often suggest a 50/50 split without much analysis. The right ratio depends on:

  • Your budget sensitivity. If a 200 bp rise would force sacrifices, fix more of the loan.
  • Your rate expectations. If you think rates are flat or falling, variable is the sharper bet; fix less.
  • Your repayment plans. Fixed loans usually cap extra repayments at $10,000-$30,000 per year. If you plan aggressive prepayment, fix less.

Four structures that actually work

80/20 variable-heavy - most of the loan in variable with full offset and unlimited extra repayments. A small 20% fixed portion hedges the sleep-at-night risk. Best for borrowers with a cash buffer and rising income expectations.

50/50 balanced - half and half. Simple, intuitive, neither optimal nor bad. Good default for buyers unsure about their rate outlook.

30/70 fixed-heavy - lock in most of the loan when you expect rising rates. Only makes sense in the early-to-mid stages of a hiking cycle; pricing in late stages already reflects expected peaks.

Stepped fixing - fix 25% for 1 year, 25% for 2 years, 25% for 3 years, keep 25% variable. You reprice a quarter of the loan every year, smoothing the average rate over time. Elegant in theory; fiddly to manage in practice.

Fees and traps

  • Splitting is usually free at origination. Splitting an existing loan often incurs a $350 fee.
  • Offset applies only to the variable portion. The fixed portion doesn’t benefit from offset balance.
  • Break costs only apply to the fixed portion. Refinancing the variable half is free; the fixed half is expensive until the fix expires.
  • Extra repayments usually can’t flow between portions. Money paid onto the fixed side stays there until maturity.

What we’d suggest for most clients

For a first-home buyer on a tight budget: 60% fixed (3 years) + 40% variable with offset. Cash in the offset builds your buffer; fixed gives you certainty during the early years when the loan balance is highest.

For an investor: 100% variable. Offset on the owner-occupier, interest-only on the investment, flexibility on both. Splits rarely earn their keep on investment files.