Fixed Rates and Offsets: The Pros and Cons for Investors

Most lenders will not attach an offset account to a fixed rate investment loan.

That single design constraint shapes how you structure debt when building a property portfolio. The decision between fixing for rate certainty and holding a variable loan with offset affects cash flow, tax deductions, and refinancing capacity. Commercial lawyers funding their first or second investment property often face this choice without clear guidance on the structural trade-offs.

Why Lenders Separate Fixed Rates and Offset Accounts

Lenders price fixed rate products by locking in a margin against their own wholesale funding cost for the fixed period. An offset account reduces the interest you pay without changing the principal balance, which creates a mismatch between the lender's locked funding cost and the interest they collect. Most lenders avoid this by excluding offset accounts from fixed rate investment loans entirely.

A small number of lenders will attach an offset to a fixed loan but they apply a partial offset, often 40 per cent to 60 per cent of the balance held in the account, rather than a full 100 per cent offset. That structure still reduces the lender's interest margin during the fixed period, so the rate offered is typically 0.15 to 0.30 percentage points higher than a standard fixed rate without offset.

If you hold surplus cash and want both rate certainty and the ability to reduce interest through an offset, a split loan structure is the usual workaround. You fix a portion of the loan amount and leave the remainder on a variable rate with full offset attached to the variable portion.

Fixed Rate Investment Loans and Interest Deductibility

Interest on borrowings used to acquire or hold rental property is deductible to the extent the property is rented or held to produce assessable income. Fixing the rate does not change that deduction.

An offset account on a variable rate investment loan reduces the interest you pay, which also reduces your deduction. That reduction may be acceptable if you expect to redraw funds for another deductible purpose later, or if your marginal tax rate is low enough that cash flow takes priority over maximising deductions. For most commercial lawyers with rental income and salary in higher marginal brackets, paying down non-deductible debt first and leaving investment loan balances untouched delivers a larger net benefit.

Consider a scenario where you hold a variable rate investment loan with offset attached. You place $50,000 in the offset account. That cash reduces the interest charged on the loan, so your deduction falls by the amount of interest saved. If you instead use that $50,000 to reduce the balance of a non-deductible home loan or personal debt, you save the same interest amount without giving up any deduction. The offset on the investment loan is only useful if you have no other non-deductible debt to pay down, or if you need liquidity for an imminent deductible purpose such as a deposit on a second investment property.

Refinancing Fixed Rate Investment Loans Before Maturity

Breaking a fixed rate loan before the end of the fixed term usually attracts a break cost. The cost is calculated as the economic loss the lender suffers by having to re-fund the loan at a lower wholesale rate than the rate at which they initially funded your loan. If wholesale rates have fallen since you fixed, the break cost can be substantial. If wholesale rates have risen, the break cost may be zero or minimal.

That calculation matters when you want to refinance an investment loan to release equity for a second purchase, or to consolidate multiple loans. Lenders calculate break costs using their own methodology, so the amount varies. Some lenders publish break cost calculators, but most require a formal request for a payout figure.

If you anticipate needing to refinance or release equity during the fixed period, either fix for a shorter term or leave a portion of the loan on a variable rate with the ability to refinance that portion without penalty. You can also fix in stages, with different portions expiring at staggered intervals, which reduces the likelihood that your entire loan balance is locked when you need to act.

Split Loan Structures for Investment Property

A split loan divides the total loan amount into two or more portions. You might fix 60 per cent of the loan for rate certainty and hold 40 per cent on a variable rate with offset attached. The fixed portion provides stable repayments. The variable portion with offset gives you a place to park surplus cash and reduces interest without locking the funds away.

In our experience, commercial lawyers with variable income from performance bonuses or partnership distributions often prefer a split structure. The fixed portion covers the base interest cost. The variable portion with offset absorbs the surplus cash when it arrives, without committing to a redraw process or losing deductibility.

You can adjust the split ratio depending on your risk tolerance and cash flow pattern. A 50-50 split is common, but there is no requirement to divide the loan evenly. Some lenders allow up to four or five separate splits under a single loan facility, though administrative complexity increases with each additional split.

Interest Only Repayments and Investment Loan Structure

Most interest only investment loans are structured with an interest only period of one to five years, after which the loan reverts to principal and interest repayments. Fixing the rate during the interest only period locks in the interest cost, but does not extend the interest only period itself unless you negotiate a longer interest only term upfront.

If you fix for three years and your interest only period is also three years, the loan will revert to principal and interest at the same time the fixed rate expires. That timing can create a cash flow change that some borrowers do not anticipate. If you want to extend the interest only period at that point, you will need to apply to the lender for an extension, which is assessed based on your serviceability and the lender's current policy settings at that time.

Lenders tightened interest only approvals following regulatory guidance, and some now limit total interest only periods to five years over the life of the loan. If you are relying on interest only repayments to support cash flow while expanding your property portfolio or managing other commitments, confirm the maximum period available before you fix the rate.

Offset Accounts on Variable Investment Loans and Debt Recycling

An offset account on a variable investment loan can support a debt recycling strategy. You make principal and interest repayments on a non-deductible home loan, then redraw or borrow against the equity created to acquire an investment property. The redrawn amount is deductible because it is used for an income-producing purpose.

If you hold surplus cash in an offset account on the investment loan, that cash does not reduce the principal balance, so you do not create additional equity. The offset reduces interest, but the loan balance remains unchanged. That structure is less useful for debt recycling than paying down the principal of a non-deductible loan and later redrawing or refinancing the freed equity into a new deductible loan.

The offset account on an investment loan is most useful when you expect to need the cash for another deductible purpose within a short period, such as a deposit on a second property, or when you want liquidity without applying for a redraw.

The Regulatory Context for Investment Loans from 1 July 2027

From 1 July 2027, net rental losses from residential investment properties acquired on or after 7:30pm AEST on 12 May 2026 can only be offset against other residential rental income, or carried forward. They cannot be offset against salary or other income. Properties held before that date are grandfathered under the existing negative gearing rules. Eligible new builds retain full negative gearing treatment regardless of purchase date.

That change does not alter how fixed rates or offset accounts function, but it changes the tax benefit of holding an investment property that produces a rental loss. If you are a commercial lawyer acquiring an established property after 12 May 2026 and you expect the property to run at a loss after deducting interest and other expenses, the loss will not reduce your taxable salary. You may still claim the loss, but it is quarantined until you have rental income or capital gains from residential property to offset it against.

The value of maximising deductions by avoiding an offset account on the investment loan diminishes if those deductions cannot reduce your current taxable income. In that scenario, managing cash flow and liquidity may take priority over maximising deductions, which makes a variable rate loan with offset more attractive than it would have been under the previous rules.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions