Deciding which home loan will be the best option can be very difficult. This is even more important in an interest rate-dropping cycle. At RFS, we predict some lenders may try and buy market share and offer cheaper 2, 3-year fixed-rate loans in the near future. Should we take up one of these or stay variable, or should we split out loan part variable and part fixed? Depending on your circumstances, splitting your home loan can enable you to get the best of both worlds.

If you are considering splitting your loan you have to decide how much or what percentage of the loan should be split or variable. Many clients elect to go 50/50 however this is just an example. For a $600,000 loan, this would see your loan divided into two loans - a fixed interest rate would be charged on $300,000 and the remaining $300,000 would have a variable interest rate.

There are advantages to both variable and fixed interest rates. With a split loan, you can keep the benefits that are most important to you. These include the ability to pay more, redraw, and offset accounts.

The portion of your loan that is fixed wouldn't benefit from a drop in interest rates, the upside is you will have comfort knowing rates can't increase.

On the variable loan portion, you benefit from any interest rate drops.

If the interest rate does drop, your repayments won't automatically change. You can choose to lower them or keep your repayments at the same level so you repay your home loan faster.

Fixed-rate can incur penalties to pay out before the end of the term so this needs to be factored into the decision.

At the end of the day, it's about the average of the interest rate you are paying. If you can take advantage of cheaper fixed rates these can lower the average rate and give peace of mind with repayments.