Split rate mortgage

Definition

Spilt rate mortgages are home loans set up with a mix of fixed and variable rates. The term 'split' simply suggests a combination of features or attributes and in this case refers to a combination of interest rate types. Although the suggestion is that you have one loan which is split, you will wind up with multiple loan contracts, multiple loan accounts and sometimes, multiple fees.

Mortgage Terms (duration)

Splitting rates does not affect the term of your mortgage.

Advantages

There are two advantages to split rate mortgages. One that mostly benefits you the borrower and one that mostly benefits the lender.

The first advantage relates to borrowers who are concerned about the risk of interest rates increasing, who want the protection a fixed rate mortgage offers, but also want interest reducing features such as offset accounts or access to additional repayments. Most fixed rate mortgages have very limited interest saving options during the fixed rate term. Lenders usually limit additional payments and prohibit the redraw of any extra payments during the fixed rate term by either charging excessive redraw fees or simply not allowing the redraw under the contract. Although there are a small handful of lenders that offer redraw and/or offset facilities. It is usually more economical to split your mortgage to include a smaller variable rate component to allow you to take advantage of interest saving options.

The second advantage doesn't favour you. It favours lenders or mortgage brokers who are working with customers who are uncertain whether they should fix or not and who do not have the right amount of information to make an informed decision. As this doesn't really offer any advantage to you, it is discussed in the disadvantages below.

Disadvantages

Splitting your mortgage will result in additional paperwork and may also result in additional fees. The main disadvantage of a smart split fixed/variable solution is that fixed rate mortgages lock in your rate regardless of whether fixed rates rise or fall. The result can be that you are locked into a rate that is much higher than if you chose a variable rate option. However the trade off is security.

A common disadvantage occurs when you choose a half fixed, half variable solution as a way for you to hedge your bets. The reassuring advice most lenders and mortgage brokers offer is 'you get the best of both worlds'. This is a half truth because it is the lender and broker who gets the best of both worlds, not you. The fixed part anchors your whole loan with them no matter how well they look after you or what rate they change the variable part of the loan to. It damages your ability to vote with your feet. Even though half is fixed, if rates increase, your repayments and interest costs will also increase. This strips away repayment certainty, which is the only advantage of a fixed rate loan.

Beware of

Half fixed, half variable rate recommendations and additional fees for splitting. There should be few if any fees associated with arranging a split rate mortgage. If your lender does charge fees, make sure they are factored into your cost comparison between different lender offerings.

Pricing

Except for very limited establishment fees, a split rate mortgage should not cost you any extra. Fees associated with 'splitting' should be one off, rather than ongoing.

Popularity

In Australia split rate mortgages are generally less popular that fully variable rate mortgages.