Combination and split loans refers to a loan structure where the loan is split into a variable rate portion and a fixed rate portion. The variable rate portion repayments are at risk of change if rates go up while the fixed rate portion repayments are locked but may become expensive if rates go down. The variable portion allows unlimited extra repayments while the fixed rate portion typically has restricted extra repayment allowance. Both portions have advantages and disadvantages depending on which way future rates move and what extra repayments are intended during the fixed rate period.

So how do you choose the right split portions? Is 50/50 the simple answer? The answer is typically different for every borrower. Normally people only fix loans if they expect rates may go up during the fixed rate period. Therefore, it’s the variable portion that is expected to create risk for future loan repayments. Common strategy is to work the maximum extra loan repayments that could be made to the variable portion during the fixed rate period. If the variable portion is expected to be repaid faster then the risk is reduced with each extra repayment even if rates do go up. Once you have determined the maximum variable portion repayments, the rest can be fixed since no extra repayments will be made to this portion to avoid fixed rate break fees. These portions can then be adjusted depending on things like expected offset balance, and potential windfall events like tax refunds, work bonuses, and inheritance. The margin between variable and fixed rates may also be relevant before making a final decision about the preferred loan splits.

If you are considering a combination loan, and need a review of your finances to determine what split portions are appropriate for your needs, we are happy to do a no obligation finance health check.