Fixed Rate Loans and Offset Accounts: What Not to Do

A fixed rate investment loan and an offset account are two different tools, and some lenders do not allow an offset on a fixed rate loan. Check this before you choose a structure, because it affects how much interest you pay and how much cash you can reach.

For Melbourne investors, the decision usually comes down to certainty versus flexibility. Here is how each tool works and where investors go wrong.

How Does a Fixed Rate Investment Loan Work?

A fixed rate investment loan locks your interest rate for an agreed period, so your repayments stay the same during that time. The trade-off is less flexibility, and the lender may charge break costs if you repay or refinance early.

That certainty helps when you are planning cash flow on a rental property. You know what the loan costs each month, whatever happens to the variable rate. Whether extra repayments, redraw or an offset account are allowed on a fixed loan depends on the lender and the product, so ask before you commit. Break cost rules also differ between lenders.

How Does an Offset Account Work on an Investment Loan?

An offset account is a transaction account linked to your loan. Interest is charged on the loan balance minus the offset balance, so a higher offset balance means less interest charged.

The loan balance itself does not change, so your loan amount stays the same. Offset balances also do not reduce the loan amount when a lender calculates your loan-to-value ratio (LVR). Some offsets are full and some are partial, and fees vary, so compare the product rather than assuming.

The main trade-off is that the money has to sit in the account to work. Cash you leave there earns no interest in the usual sense. Its benefit is the interest you avoid on the loan.

Offset Accounts and Tax: What Changes

An offset account reduces the interest you are charged, so it also reduces the interest incurred, which is the basis for any deduction. Interest on an investment loan used for a rental property is generally deductible. Only the interest part of a principal and interest repayment is deductible, not the principal.

That means a bigger offset balance lowers your interest cost and your deduction together. You still come out ahead on cash, because you keep more of your money than you would have paid in interest. Your accountant can confirm how this applies to your situation, so speak to them before you set up the structure.

Tax rules for redraw are different. Under ATO Taxation Ruling TR 2000/2, the deduction depends on how the redrawn money is used. If you redraw from an investment loan for a private purpose, such as a holiday, interest on that part is not deductible. Keeping private and investment borrowing separate makes deductions easier to track. Our team can explain the options, and your accountant can advise on tax.

Fixed or Variable Rate: Which Suits an Investor?

A fixed rate suits an investor who needs certain repayments. A variable rate suits one who wants flexibility, such as extra repayments or an offset. Each has a cost, so the right choice depends on your cash flow and your plans for the property.

A split loan puts part of the loan on a fixed rate and part on a variable rate. It spreads the risk, although the fixed portion still carries the limits described above. Whether a split loan allows transfers between portions depends on the lender.

If you may sell or refinance within the fixed term, break costs could apply. Look at how long you intend to hold the property before you fix. If you are already holding a loan, our refinancing team can look at whether a different structure fits.

An Example: Splitting an Investment Loan

Splitting a loan can give an investor certainty on one part and an offset on the other. Consider an investor in Melbourne's south-east who borrows for a rental property and wants steady repayments but also wants to keep a cash buffer.

As an example, they split the loan in two. They fix one half, which gives them repayments that do not change during the fixed term. They keep the other half variable with an offset account, and they park their cash buffer there. At an illustrative rate of 6.75% p.a., interest on a $400,000 variable portion would be about $27,000 a year if nothing were offset. If $40,000 sat in the offset all year, interest would be charged on $360,000, which is about $24,300. The difference is about $2,700 a year, and it assumes the balance stays at $40,000 and the rate does not change.

The outcome is a mix of certainty and flexibility. The investor can reach their buffer at any time, and the offset cuts interest while the money sits there. The cost is that the fixed half cannot be paid down or offset in the same way, and a rate drop would only help the variable half. This is an illustration only. Use a repayment calculator and speak to a broker about your own numbers.

Interest Only or Principal and Interest?

Interest-only repayments cover just the interest for a set period, so the balance does not fall. Principal and interest repayments reduce the loan over time. Interest-only does not increase how much you can borrow.

When a lender assesses an interest-only loan, it considers repayments over the remaining term after the interest-only period ends. A 30 year loan with a 5 year interest-only period is assessed over 25 years. The repayments will rise when the loan reverts to principal and interest. Plan for that step up before it arrives.

In either case, only the interest is deductible. Ask your accountant how this fits your wider position.

Why a Broker Helps With Investment Loan Structure

A broker can compare investment loan options across many lenders, so you can see which products allow fixed rates, offsets or both. Features, fees and rates change from lender to lender.

Our investment loans page outlines how we approach this. If you are planning your first purchase, your borrowing will also depend on your deposit and your lender's LVR policy. Lending above 80 per cent LVR generally needs lenders mortgage insurance, which adds a cost.

Negative gearing rules have also changed for some properties. If a property is acquired after 12 May 2026, the rules for using rental losses may differ, so talk to your accountant before you buy. You can also read about our home loans or meet the team on our about us page.

Call one of our team or book an appointment at a time that works for you. We will work through your goals and show you which structure fits.

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