The February 2025 cash rate reduction from the Reserve Bank of Australia has reset the borrowing calculus for hundreds of thousands of owner-occupiers. On 18 February the RBA lowered the target cash rate by 25 basis points to 4.10 per cent, triggering a rapid repricing of fixed-rate home loans across the banking sector. By early March, Commonwealth Bank’s advertised three-year fixed rate for owner-occupier principal-and-interest loans had fallen to 5.39 per cent per annum, down from 5.64 per cent a month earlier, while Westpac’s equivalent product moved to 5.49 per cent. Variable rates, meanwhile, have followed the cash rate down more slowly: the same lenders’ packaged variable rates sat at 6.44 per cent and 6.49 per cent respectively, reflecting a partial pass-through of the RBA cut and leaving a spread of around 100 basis points between fixed and variable products. That spread, however, is being compressed by an aggressive wave of refinancing; the Australian Bureau of Statistics reported a 12.4 per cent lift in external refinancing commitments in the December 2024 quarter, and early 2025 broker channel data suggests the trend is accelerating. For borrowers, the question is no longer simply whether to fix or float, but how to allocate a mortgage between both rate types to cushion against the next directional shift in monetary policy while preserving flexibility. The split loan—a single mortgage divided into a fixed-rate portion and a variable-rate portion—has moved from a niche structure to a mainstream hedging tool, and lender policies are evolving to accommodate it in ways that re-shape serviceability, deposit requirements and break-cost exposure.
How a split loan operates
A split loan is a single mortgage account governed by one loan contract and one registered security, but internally apportioned into two or more tranches that carry different interest rate bases. The borrower makes one monthly repayment, which the lender calculates by summing the scheduled repayments on each portion. There is no requirement for the portions to be equal; a 50-50 split is common, but any ratio that complies with the lender’s minimum tranche size and maximum loan-to-value ratio rules can be structured.
Structure and mechanics
The fixed tranche locks in a contracted rate for a defined term—typically one to five years—and is priced off the swap curve rather than the cash rate. During the fixed term, the borrower cannot make extra repayments beyond an annual threshold without triggering break costs, and offset accounts usually cannot be linked to the fixed portion. The variable tranche floats with the lender’s standard variable rate (SVR) less any package discount, and attracts the borrower’s 100 per cent offset facility, redraw and the ability to make unlimited extra repayments.
When the fixed term expires, lenders automatically roll the fixed portion onto their SVR, which creates a cliff in monthly repayments unless the borrower re-fixes or refinances. The split structure therefore allows a portion of the debt to benefit from falling variable rates without locking the entire balance out of offset functionality.
Portion sizing constraints
Each lender sets a minimum fixed tranche size, often $10,000 or $20,000, and a maximum total loan LVR. The Australian Prudential Regulation Authority’s APS 220 guidance, reaffirmed in October 2024, imposes no explicit LVR cap on split loans, but lenders overlay their own risk appetite. The big four—Commonwealth Bank, Westpac, NAB and ANZ—generally permit a split up to an 80 per cent LVR without lenders mortgage insurance, provided the variable portion remains within the 80 per cent ceiling and the fixed portion does not push the total above that threshold. Non-bank lenders such as Resimac, Pepper Money and La Trobe Financial will split loans up to 90 per cent LVR with LMI, but they typically require the fixed portion to be capped at 80 per cent of the security value, with the LMI premium calculated only on the unfixed balance above that mark.
Fixed versus variable rate allocation in the current cycle
The post-February rate environment has inverted the traditional decision-tree. Until mid-2024, the fixed-rate premium over variable rates meant fixing was an income-shock hedge rather than an expected saving. Now that the three-year swap rate has declined below the market-implied terminal cash rate, fixing offers a tangible discount for the first time since early 2022.
Rate predictions and historical spreads
At 4.10 per cent, the cash rate is 25 basis points below the peak of 4.35 per cent that prevailed from November 2023 to February 2025. Money market pricing implies a further 50 basis points of cuts by December 2025, which would take the cash rate to 3.60 per cent. If lenders pass through each cut in full—which history suggests is more likely for variable rates than for fixed—the typical packaged variable rate would decline from 6.44 per cent to 5.94 per cent over the same period. The current three-year fixed rate of 5.39 per cent already sits below that projected year-end variable rate, meaning a borrower who fixes for three years today is locking in a rate that is lower than what the market expects the variable rate to reach after two more cuts. The spread is not costless: it bakes in a liquidity and optionality premium that the lender recoups if rates fall faster than anticipated, but for a borrower who cannot stomach the risk of a rate re-steepening driven by a reversal in inflation, fixing a proportion of the debt is a form of insurance.
Cash rate linkage and offset optimisation
Variable rates track the cash rate with a lag and an incomplete pass-through. The big four passed through the full 25-basis-point February cut only to their SVRs after a two-week deliberation, while some smaller lenders, including ING and Macquarie, passed through only 20 basis points and widened their net interest margins. That asymmetry underlines the value of placing the variable portion into a mortgage that delivers a discount against SVR and allows an offset account to sit against the floating tranche. A borrower with a $500,000 loan split 50-50 would have $250,000 fixed at 5.39 per cent and $250,000 variable at 6.44 per cent, giving a blended rate of 5.92 per cent. If they hold $30,000 in an offset account against the variable tranche, the effective rate on that portion falls to approximately 5.67 per cent, lowering the blended rate to 5.53 per cent—an outcome that is 39 basis points cheaper than a pure fixed loan and 91 basis points cheaper than a pure variable loan of the same face value. The optimum allocation shifts with the borrower’s expected offset balance: the larger the expected offset, the larger the variable tranche should be.
Lender policy and serviceability treatment
APRA’s serviceability assessment framework remains the binding constraint for many borrowers, especially investors and those with household debt-to-income ratios above six times. A split loan complicates the buffer calculation because the fixed and variable portions are assessed at different rates.
How the buffer applies to split loans
Under APS 220, a lender must assess a borrower’s ability to service the loan at an interest rate that is the higher of the lender’s floor rate—typically 7.50 per cent for major banks—and the loan’s actual interest rate plus a 3.0 percentage point buffer. For a variable loan, that generally pushes the assessment rate above 9.0 per cent. For a fixed loan that is not a hardship reason fixed-rate loan, the buffer is applied to the revert-to rate that will apply after the fixed term expires. If the fixed period is three years, the lender assesses the borrower at the current revert-to variable rate plus 3.0 per cent, which for a major bank today would be approximately 6.44 per cent plus 3.0 per cent, or 9.44 per cent.
When the loan is split, the lender calculates the assessment rate as a weighted average, using the revert-to rate for the fixed portion and the actual variable rate for the floating portion. For a $500,000 loan split 60 per cent fixed ($300,000 assessed at 9.44 per cent) and 40 per cent variable ($200,000 assessed at 9.44 per cent as well, because the variable rate plus buffer also reaches 9.44 per cent), the assessment is no more onerous than a pure variable loan. However, non-bank lenders such as Athena Home Loans and Homestar Finance have begun applying a 2.5 percentage point buffer to the fixed portion for borrowers with a loan-to-value ratio below 70 per cent and a DTI below 6, which can materially lift maximum borrowing power. Athena’s policy, updated on 14 January 2025, applies an assessment rate of 7.89 per cent to the fixed portion if the fixed rate is 5.39 per cent and the buffer is 2.50 per cent, reducing the weighted average assessment rate and boosting borrowing capacity by roughly 6 per cent compared with the big-four buffer math.
LVR and DTI caps for split structures
Big-four lenders treat a split loan as a single facility for LVR purposes, so the combined LVR must fall within the applicable cap. For owner-occupier loans without LMI, that cap is 80 per cent; with LMI, 95 per cent including capitalised premium. DTI is calculated on the total facility limit, and the 6.0x DTI threshold that ANZ and NAB enforce for loans originated through the broker channel applies irrespective of the split. Non-bank lenders such as Firstmac and Liberty Financial offer higher maximum LVRs of 95 per cent on split structures, provided the fixed portion remains below 80 per cent. Firstmac’s credit guide, effective from 3 February 2025, caps the combined LVR at 95 per cent inclusive of LMI for prime full-doc borrowers, with a DTI limit of 8.0x, but cuts the variable portion LVR to 70 per cent if the fixed portion exceeds 50 per cent of the total facility. That rule prevents a borrower from loading all the risk onto the variable tranche and using the fixed rate to eke out a higher total LVR.
The appeal of splitting during a declining rate phase
The mortgage broker channel reported a sharp increase in split-loan applications in the first quarter of 2025, with the split category accounting for 31 per cent of new owner-occupier lodgements at AFG and 27 per cent at Mortgage Choice, up from 19 per cent in the same period a year earlier. Several structural drivers explain the shift.
Rate-lock timelines and refinancing activity
When fixed rates are falling, lenders typically reprice them in increments of 10 to 25 basis points at intervals of two to three weeks. A borrower who decides to fix today can request a rate lock—usually 60 or 90 days—on the fixed portion while the loan is being processed, protecting against further increases but also freezing out further decreases. A split loan mitigates the risk of buyer’s regret because the variable portion captures any further rate declines during the lock period. Westpac’s rate-lock policy, updated on 17 February 2025, allows the borrower to elect a 60-day lock for a fee of 0.10 per cent of the fixed loan amount, or a 90-day lock for 0.15 per cent, with the fee refunded if settlement does not occur. Non-bank lender loans.com.au waives the lock fee entirely for split loans where the variable portion is at least 30 per cent of the total facility, a concession designed to attract refinancers who want to split but remain exposed to the variable rate trend.
Hedging for first home buyers
First home buyers navigating a falling rate cycle face a particular challenge: they are buying at prices that have not yet fully reflected the lower cost of debt, and they are often stretched on serviceability. A split loan allows them to anchor part of the debt at the lower fixed rate to reduce the monthly commitment, while keeping a portion variable so they can accelerate repayments when rates fall further, or link an offset account to a savings buffer. State government stamp-duty concessions and the federal First Home Guarantee scheme—which underwrites loans up to 95 per cent LVR without LMI—are compatible with split structures at participating lenders. NAB, which is the largest panel lender for the First Home Guarantee, confirms in its broker accreditation manual (edition 1.2, January 2025) that the fixed portion can be up to 70 per cent of the total loan under the scheme, with the variable portion making up the balance and carrying an offset account. That split reduces the borrower’s monthly repayment by an estimated $78 per $100,000 borrowed, based on the spread between NAB’s three-year fixed rate of 5.49 per cent and its base variable rate of 6.44 per cent.
Caveats every borrower should price in
A split loan is not costless optionality. Borrowers who do not understand the structural limitations of both portions can end up paying for flexibility they cannot use.
Break costs on the fixed portion
Fixed-rate loans carry a break-cost formula that references the change in the swap-rate curve since the fixed rate was locked. When market rates move lower after settlement, the lender incurs a loss on the fixed-rate contract, and the borrower is liable for that economic loss. During a declining rate cycle, break costs can be substantial. Australian Securities and Investments Commission guidance, last updated in 2023, requires lenders to disclose the break-cost methodology before settlement, but borrowers typically only encounter the dollar figure when they seek to discharge the loan early. Even a partial discharge—such as selling the property before the fixed term ends—can crystallise a charge running to five figures. Borrowers who retain the variable portion gain some protection because they can sell and repay the variable tranche without penalty, but any forced sale of the property will still trigger a break on the fixed portion.
Offset account constraints
The most common borrower misunderstanding is that an offset account offsets the entire loan balance. Lenders apply the offset balance only against the variable portion; the fixed portion accrues interest at the contracted rate regardless of the offset balance. For a 50-50 split on a $500,000 loan, a $30,000 offset balance reduces the interest-carrying variable balance to $220,000, but the full $250,000 fixed balance remains charged at the fixed rate. Borrowers who anticipate holding a large offset sum—for instance, a self-employed borrower retaining a tax reserve—should increase the variable tranche accordingly, typically to 70 per cent or more of the total loan, while keeping the fixed allocation to the minimum required to achieve the desired rate-hedge.
Rate review clauses and re-pricing rights
Big-four lenders typically do not re-price the variable portion of a split loan unless the borrower requests a rate review and can demonstrate they have held the loan for a period—usually 12 months—with a clean repayment history. Non-bank lenders are more flexible: Resimac, for example, links the variable portion of a split loan to its Smart Booster product, which automatically re-prices every six months to reflect the borrower’s improving credit profile and LVR. Borrowers who split with a lender that does not offer an automatic re-price mechanism risk the variable portion drifting above market once the honeymoon period ends, eroding the blended rate advantage. A loan with a 30 basis point premium on the variable portion will need a correspondingly lower fixed rate to deliver a net benefit.
Actionable steps for a split-loan decision
- Choose the ratio using your offset balance, not just the rate spread. Calculate the effective variable rate after allowing for the offset, then solve for the split ratio that minimises the blended rate. A borrower holding $50,000 in offset on a $600,000 loan might be better served with 40 per cent fixed and 60 per cent variable, even though the fixed rate is cheaper on paper.
- Compare break-cost formulas across lenders. The methodology is not uniform; some lenders use a swap-market-to-market calculation that is more volatile than others. Request a written illustration of the break cost for a scenario where the fixed rate falls 100 basis points within the first year, and compare it across at least three lenders.
- Ask for a rate review clause on the variable leg. If the lender does not offer automatic re-pricing, request a written undertaking that the variable rate will be reviewed no less frequently than annually and will be adjusted to the new-customer rate if the LVR has fallen to 70 per cent or less.
- Check the fixed-portion LVR cap before committing. With non-bank lenders, a 95 per cent LVR split loan often requires the fixed portion to stay at or below 80 per cent, which may force a 15 per cent variable tranche that carries a higher interest cost. Ensure the LVR allocation meets your liquidity needs.
- Time the rate lock to expire as close to settlement as possible. A 90-day lock protects against rate rises but prevents you from benefiting if fixed rates continue to slide. If the lender allows it, lock the fixed portion only once the property settlement date is confirmed and within a window where the lock expiry coincides with that date.