Investment Loans: Fixed Rates and Offset Accounts Explained

Most lenders won't let you attach an offset account to a fixed rate investment loan.

That creates a problem if you're holding cash for renovations, a future deposit, or simply want flexibility without paying down the loan balance. The usual workaround is to split your borrowing between fixed and variable portions, putting the offset against the variable portion. You get rate certainty on part of the debt and liquidity on the rest. But the numbers need to make sense, and the new negative gearing rules that came into force on 1 July 2027 have changed how that split plays out for properties purchased after May last year.

Why Fixed Rate Investment Loans Don't Include Offsets

A fixed rate locks in the lender's funding cost. An offset account reduces the interest you pay without reducing the principal balance. The lender can't hedge a loan amount that fluctuates daily, so they exclude offset functionality from fixed rate products. If you want to hold cash and reduce interest at the same time, you need a variable rate loan or a variable portion within a split.

Consider a buyer who settled on a two-bedroom unit in Mount Eliza in late June and wanted to fix 70 per cent of the $450,000 loan for three years. She had $60,000 in savings set aside for kitchen and bathroom upgrades planned for the following year. Putting that $60,000 into an offset attached to the 30 per cent variable portion meant she paid interest only on $135,000 minus $60,000, or $75,000, while the fixed portion covered the other $315,000. The offset delivered flexibility without forcing her to park funds in a savings account earning less than the loan rate.

How Split Loans Work for Property Investors

A split loan divides your borrowing into two or more accounts. Each account can have its own rate type, repayment structure, and features. You might fix 60 per cent at 5.89 per cent on interest-only terms and leave 40 per cent variable at 6.34 per cent with an offset and principal-and-interest repayments. The variable portion gives you redraw or offset access, and the fixed portion gives you budget certainty.

Lenders calculate interest daily on each portion separately. If you hold $50,000 in an offset linked to a $200,000 variable split, you pay interest on $150,000. The fixed split continues to accrue interest on the full balance regardless of how much cash you hold elsewhere. Most lenders let you split into two or three portions without additional fees, though some cap the minimum size of each split at $10,000 or $50,000 depending on the product.

When you're comparing investment loan options, ask whether the lender allows uneven splits. Some will only offer 50/50 or 70/30. Others let you nominate any percentage. The right mix depends on how much liquidity you need and how much rate movement you're willing to wear. If you're holding significant cash for planned capital works or expect rental income to build up between tax payments, a larger variable portion makes sense. If your cash flow is tight and you want certainty, skew the split toward fixed.

Interest Deductibility and Offset Funds for Investment Property

Interest on an investment loan is deductible when the borrowing is used to acquire or hold a property that produces assessable income. The Australian Taxation Office has consistently held that funds in an offset account do not reduce the purpose of the original borrowing. You can hold personal savings in an offset linked to an investment loan without affecting the deductibility of interest on the full loan balance.

That treatment remains unchanged under the new negative gearing rules. What has changed is that net rental losses on residential properties purchased after 7:30pm on 12 May 2026 can only be offset against other residential rental income or carried forward. You can't deduct those losses against your salary or business income from 1 July 2027 onward unless the property qualifies as an eligible new build.

For properties grandfathered under the old rules, the strategy hasn't shifted. For new purchases, the value of deductible interest falls if you can't use the deduction immediately. If you're buying an established dwelling and expect negative cash flow, holding surplus funds in offset rather than paying down the loan preserves flexibility but delivers less immediate tax benefit than it would have before the law changed.

Fixed Rate Break Costs and What Triggers Them

A fixed rate contract locks in the lender's cost of funds for the agreed term. If you repay the loan early, refinance, or make a lump sum payment above the allowable threshold, the lender will charge a break cost if their funding cost at the time of discharge is lower than the rate you fixed. Break costs can run to thousands or even tens of thousands depending on how much time remains and how far rates have moved.

Most lenders allow up to $10,000 or $30,000 in additional repayments each year on a fixed loan without penalty. Anything beyond that threshold, or a full discharge, triggers the calculation. The formula compares the present value of interest the lender expected to receive against what they can now earn by redeploying the funds at current wholesale rates. If rates have dropped, you pay the difference. If rates have risen, the break cost is nil.

That's the second reason investors use a split structure. Keeping 30 to 40 per cent of the borrowing on a variable rate with offset gives you an escape route if your circumstances change or if a better refinancing opportunity emerges. You can repay or restructure the variable portion without penalty and leave the fixed portion in place. If you do need to break the fixed contract, having a smaller fixed balance reduces the dollar impact.

Offset Strategy When Building a Portfolio

If you're holding multiple properties, an offset account on the variable split of your most recent acquisition can act as a central liquidity pool. Rental income from all properties can flow into the one offset, reducing interest on the variable portion while you decide where to deploy the cash next. Some investors use this approach to accumulate a deposit for the next purchase without locking funds into the equity of an existing property.

The variable portion should sit on the loan with the highest interest rate if all else is equal, because every dollar in offset saves you more. But lender policy matters too. Some lenders allow multiple offset accounts linked to one loan. Others restrict you to one offset per variable split. If you're planning to use offset as a portfolio tool rather than a single-property buffer, check the lender's linking rules before you settle on a structure.

Mount Eliza sits within the Mornington Peninsula market, where rental yields on units have hovered between 3.8 and 4.2 per cent in recent quarters. A negatively geared property in this area will typically generate rental income that covers 60 to 75 per cent of the loan repayments when held on interest-only terms at current investor rates. The shortfall, along with other holding costs such as body corporate fees and council rates, creates the loss that was previously deductible against other income. Under the new rules, that loss is quarantined unless the property is a qualifying new build. Offset funds give you breathing room to cover the shortfall without drawing down redraw or selling other assets, but they don't change the underlying tax position.

When Fixing Makes Sense and When It Doesn't

Fixed rates suit investors who want certainty over cash flow and expect rates to rise or stay elevated. If you've modelled your holding costs at a fixed rate and the rental income comfortably covers interest, rates, insurance and other expenses, locking in that rate removes the risk of a mid-term budget blowout. If you're holding the property for capital growth and cash flow is secondary, a fixed term of two to four years aligns with a medium-term outlook.

Fixed rates are less useful if you plan to sell within the fixed term, if you expect to draw equity for another purchase, or if you're likely to receive a lump sum that you'd want to apply against the loan. Investors who are actively building a portfolio often favour variable rates with offset because the liquidity and flexibility outweigh the rate certainty. The split approach tries to capture both, but it only works if the fixed portion is large enough to deliver meaningful savings and the variable portion is large enough to hold the offset balance you're likely to maintain.

If you're uncertain which structure fits your situation, a loan health check with a broker who has access to the full panel of lenders will show you the rate difference between variable, fixed, and split options for your borrowing amount and deposit level. The gap between fixed and variable rates has narrowed in recent months, and some lenders now price three-year fixed investment rates within 20 basis points of variable. That makes the decision less about cost and more about how you plan to use the facility over the next few years.

Call one of our team or book an appointment at a time that works for you. We'll compare investment loan products across the lenders we work with and show you how different split structures affect your repayments, offset capacity, and flexibility if your plans change.

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