Investment Loans and How Fixed Rates Work with Offsets

Fixed rate investment loans do not ordinarily come with offset accounts.

The majority of lenders who offer fixed rate products on investment property will either exclude the offset facility entirely or provide a redraw facility only. A redraw facility does not reduce the daily interest calculation in the same way an offset does, and accessing funds in redraw may require approval from the lender, which adds friction if you need liquidity quickly. Where an offset is available on a fixed rate investment loan, the lender typically prices the rate higher than the equivalent fixed rate product without offset, often by 0.15 to 0.30 percentage points per annum depending on the lender and the term of the fixed period.

This matters because barristers commonly hold operating capital in offset accounts linked to variable rate owner-occupied loans or variable rate investment loans. That structure keeps funds accessible while reducing interest accrual daily. A fixed rate investment loan without offset removes that option for the portion of borrowing that is fixed, so you need to decide whether rate certainty is worth the loss of daily interest reduction on parked funds.

Why Lenders Restrict Offsets on Fixed Rate Products

Lenders fund fixed rate loans by locking in their own cost of funds for the fixed period. An offset account creates uncertainty in the effective loan balance because the borrower can deposit or withdraw at any time, which changes the net interest the lender receives without changing the rate. That uncertainty complicates the lender's funding model and introduces interest rate risk, which is why most lenders either exclude offsets on fixed rate products or price them at a premium to compensate.

Under APS 112, offset balances do not reduce the loan amount for capital adequacy purposes, so the lender must hold capital against the full loan amount regardless of the offset balance. That regulatory treatment does not create the restriction, but it removes one potential reason a lender might tolerate the funding complexity.

How This Changes Cashflow Management for Investment Borrowing

Consider a barrister who borrows $600,000 on a variable rate interest-only investment loan with an offset account and typically holds $80,000 to $120,000 in the offset depending on the time of year. At current variable rates, the offset balance reduces annual interest by roughly $4,000 to $6,000 depending on the average balance held. If that borrower fixes the rate for three years without offset, the interest saving from the offset disappears for the fixed period, even if the funds remain in a transaction account linked to the loan.

You can partially replicate the effect by placing the surplus funds in a separate offset account linked to a different variable rate loan, whether that is another investment loan or an owner-occupied loan. The interest reduction will apply to whichever loan the offset is linked to, but if you do not have another loan with offset capacity, the funds will sit in a standard savings account and contribute nothing to reducing interest.

When a Fixed Rate Without Offset Still Works

If you expect rate rises during the period you would otherwise fix, and you do not hold material surplus funds that would sit in offset, a fixed rate without offset may still reduce total interest cost compared to remaining on a variable rate. The calculation depends on the difference between the fixed rate and the expected path of the variable rate, the size of any offset balance you would otherwise hold, and the length of the fixed period.

In a scenario where a barrister fixes $500,000 at 5.79 per cent for two years and the variable rate rises to 6.40 per cent within six months and remains at that level, the fixed rate saves roughly $3,050 per annum in interest compared to the variable rate, assuming no offset balance on either product. If the same borrower would have held an average offset balance of $60,000 on the variable loan, the offset would have saved roughly $3,840 per annum at 6.40 per cent, which more than offsets the benefit of the lower fixed rate. The fixed rate would need to be below approximately 5.16 per cent to match the net position of the variable rate with that offset balance.

Split Rate Structures and How Offsets Apply to the Variable Portion

A split loan structure allows you to fix a portion of the borrowing and leave the remainder on a variable rate with offset. Most lenders will allow you to link an offset account to the variable portion of a split loan, so if you fix 50 per cent of a $700,000 investment loan and leave $350,000 variable, the offset account will reduce interest only on the $350,000 variable portion.

This structure preserves some rate certainty while maintaining access to offset functionality for the portion of borrowing that remains variable. The fixed portion provides a floor on part of your interest cost, and the variable portion with offset allows you to reduce interest on surplus cashflow. The proportion you fix depends on your risk tolerance, your expected cashflow volatility, and your view on rate movements.

How This Interacts with Negative Gearing and Deductibility

Interest on an investment loan remains deductible regardless of whether the loan is fixed or variable and regardless of whether an offset account is attached. The deductibility is determined by the purpose of the borrowing, not the loan structure. If you place non-deductible funds, such as after-tax savings, into an offset account linked to an investment loan, you reduce the interest charged on the loan, which in turn reduces your deductible interest expense. That reduces your tax benefit from negative gearing.

For a barrister in the top marginal tax bracket, every $1,000 reduction in deductible interest costs $470 in forgone tax benefit. If you hold $100,000 in an offset linked to a variable rate investment loan at 6.20 per cent, you reduce annual interest by $6,200, which reduces your tax refund by approximately $2,914. The net benefit is $3,286. Whether that net benefit outweighs the loss of offset access on a fixed rate loan depends on the rate differential and the amount you expect to hold in offset.

Practical Considerations for Barristers Building a Portfolio

If you are acquiring a second or third investment property and already hold surplus funds in offset against an existing variable rate loan, fixing the new loan without offset may make sense if you can continue to offset against the existing loan. That approach gives you rate certainty on the new borrowing without sacrificing the offset benefit on the old loan. If you do not have an existing loan with offset capacity, fixing without offset means surplus funds earn standard savings account interest, which is taxable and typically lower than the interest rate on the loan.

Expanding your property portfolio involves weighing these trade-offs across multiple loans, and the structure that works for one property may not suit another. Some barristers prefer to fix the loan on a property with stable, long-term tenants and leave the loan on a property with higher vacancy risk or planned renovations on a variable rate with offset. That approach aligns rate certainty with cash flow stability.

If you are considering investment loan refinancing, you can restructure the rate mix and offset arrangements across your portfolio. Refinancing also provides an opportunity to negotiate rate discounts or access lenders who offer offset on fixed rate investment products, although those products remain uncommon and are typically priced at a premium.

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