Smart ways to approach fixed rate investment loans

Fixed rate investment loans do not permit offset accounts.

Most lenders will allow you to attach an offset account to a variable rate investment loan, but when you fix the rate, that offset facility is switched off for the duration of the fixed term. The interest on your fixed loan is calculated on the full balance, and any cash sitting in an offset account linked to that loan stops reducing your interest charge. That arrangement changes your after-tax position, because the interest deduction you can claim is now higher, but so is the actual interest you pay.

Why lenders separate fixed rates and offset accounts

Lenders price fixed rate loans by hedging their funding costs in the wholesale market. When you lock in a fixed rate, the lender commits to a cost of funds for that period and earns a margin on the difference between what it pays and what you pay. If you could reduce the loan balance with an offset account, the lender's exposure would fluctuate daily while its wholesale funding cost remains fixed. That creates a mismatch the lender is not willing to carry, so offset functionality is removed from the product.

How cash flow changes when you fix an investment loan

Consider a buyer in Baldivis who refinances an investment property with a loan balance of $450,000. Under a variable rate loan with offset, they keep $30,000 in the linked account and pay interest only on the net $420,000. When they switch $300,000 of that loan to a fixed rate to lock in repayments, the offset account no longer reduces the fixed portion. Interest is now charged on the full $300,000, and the $30,000 in cash either sits idle in the offset linked to the remaining variable split, or needs to be redeployed elsewhere. The interest deduction increases because the investor is now paying interest on a higher effective balance, but the cash outflow also increases unless that $30,000 is put to work.

Split rate structures and how they work in practice

A split rate loan divides your total borrowing into two or more portions, each with its own interest rate type and repayment terms. One portion might be fixed for three years on interest-only repayments, while the other remains variable with an offset account attached. Each split operates as a separate sub-account, and most lenders allow you to adjust the proportions when a fixed term expires or when you refinance.

In our experience, investors near Baldivis and Wellard often split 60 per cent fixed and 40 per cent variable when they want rate certainty on the majority of the debt but still need access to offset benefits and the flexibility to make lump sum repayments without penalty. The variable portion carries the offset account, so surplus cash continues to reduce interest on that split, and any extra repayments or redraw requests are processed against the variable loan only. You cannot redraw from the fixed portion during the fixed term, and lump sum repayments to the fixed split usually incur a break cost if you pay more than the small annual allowance most lenders permit.

Interest-only repayments and the effect on investor cash flow

Interest-only repayments are set on a loan-by-loan basis, not across the whole facility. If you fix one split on interest-only and leave the other variable on principal and interest, your monthly commitment will be lower on the fixed portion but higher on the variable portion. The choice depends on whether you want to maximise short-term cash flow, in which case interest-only on both splits is common, or build equity faster on the variable portion while holding the fixed split interest-only.

Interest-only periods are approved for up to five years at a time on investment loans, and you can apply to extend that period when it expires if the property still qualifies as an investment and your circumstances support the request. Lenders assess rental income, other debts, and your overall borrowing capacity when deciding whether to extend interest-only terms, and some will require a valuation if the loan-to-value ratio is above 80 per cent.

What happens to your offset account when you refinance

When you refinance an investment loan, the new lender will set up a fresh loan structure, and you nominate at that point whether you want a variable loan with offset, a fully fixed loan without offset, or a split. If you are moving from a variable loan with offset to a partially fixed structure, the offset account linked to your old loan is closed when that loan is discharged, and the new lender opens a new offset account linked only to the variable portion of the new loan. Any funds in the old offset account need to be transferred manually, they do not move across automatically.

We regularly see this catch investors who assume the offset balance will carry over without action. The gap between discharge and the new offset account being activated can be a few days, and during that window the cash is not reducing any interest unless you arrange the transfer in advance.

Rate discounts and how fixing affects your variable portion

Most lenders offer separate rate discounts for fixed and variable portions of a split loan. The discount on the fixed rate is usually smaller than the discount on the variable rate, because fixed rates are priced off wholesale swap rates rather than the lender's standard variable rate. When you lock in a fixed rate, you are accepting the advertised fixed rate minus any applicable discount, and that rate will not change regardless of what happens to the Reserve Bank cash rate or the lender's standard variable rate during the fixed period.

The variable portion of your split continues to move with the lender's standard variable rate, and your discount off that rate is locked in for the life of the loan unless the lender changes its discount policy or you breach a condition of the loan. If you are considering a split structure, confirm with your broker what discount applies to each portion and whether any features, such as offset or redraw, are removed when you fix part of the loan.

Tax treatment of interest when you split a loan

Interest on the entire investment loan amount remains deductible as long as the borrowing is used to acquire or hold the rental property and the property continues to be rented or available for rent. Splitting the loan into fixed and variable portions does not change the deductibility, because the total amount borrowed has not changed and the purpose remains the same. What does change is the amount of interest you pay, because switching off the offset on the fixed portion means you are charged interest on the full fixed balance rather than a reduced balance.

For properties held before the negative gearing changes take effect in mid-2027, interest will continue to offset against your other income under existing rules. For properties purchased after that date, unless they qualify as eligible new builds, rental losses including interest costs will be quarantined and can only offset future rental income or capital gains from residential property. The structure of your loan, whether split or not, does not alter that tax treatment, but it does affect the size of your deduction and the timing of your cash flow.

When fixing part of your loan makes sense

Fix part of your investment loan when you want certainty over a portion of your repayments and you have enough surplus cash flow or rental income to cover the variable portion without relying on offset to reduce interest. If your rental income is steady and you do not expect lump sum repayments during the fixed period, a 50 to 70 per cent fixed split can reduce your exposure to rate rises without giving up all flexibility.

If you are holding significant cash in offset and that balance regularly reduces your interest by a meaningful amount, fixing a large portion of the loan removes that benefit and may not be the right move unless you can redeploy the cash into another investment or offset it against a different variable loan. For investors in Baldivis with multiple properties, splitting across different loans rather than within a single loan can give you more control, because each property can carry its own offset account linked to its own variable loan, and you choose which properties to fix independently.

Refinancing out of a fixed rate before the term ends

If you refinance during a fixed rate term, the lender will charge a break cost to compensate for the difference between the rate you agreed to pay and the rate the lender can now earn by lending that money elsewhere. Break costs are calculated using the lender's wholesale funding rates, and they can be substantial if market rates have fallen since you fixed. If rates have risen, the break cost may be zero, because the lender can re-lend the funds at a higher rate.

Most lenders allow you to port a fixed rate loan to a new property if you sell the secured property during the fixed term, but that option depends on the new property being acceptable security and your circumstances still supporting the loan amount. Porting avoids the break cost, but it locks you into the same lender and the same fixed rate, which may not suit your strategy if you are buying a different type of property or increasing your borrowing.

Call one of our team or book an appointment at a time that works for you if you are weighing up a fixed rate split on an investment loan and want to see how the numbers work with and without offset attached to the variable portion.

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