Do Fixed Rates and Offsets Work on Investment Loans?

Can You Use an Offset Account with a Fixed Rate Investment Loan?

Most lenders do not offer offset accounts on fixed rate investment loans. A handful of lenders will attach an offset to a fixed product, but the offset typically does not reduce the interest charged during the fixed period. Instead, it accumulates a credit applied when the loan reverts to variable.

This matters because offset accounts on investment loans deliver different value compared to owner-occupied lending. On an owner-occupied loan, the offset reduces non-deductible interest, so every dollar saved is a dollar you keep. On an investment loan, the interest is usually deductible, so the real saving is the after-tax benefit. An offset on an investment variable rate loan still works, it just works differently.

Consider an investor with a variable rate loan at 6.5 per cent and $50,000 sitting in an offset account. That offset saves around $3,250 in annual interest. If the investor's marginal tax rate is 37 per cent, the after-tax benefit is around $2,048. The offset still saves money, but the value is lower than it would be for an owner-occupier at the same rate because the interest would have been deductible anyway.

On a fixed rate investment loan, that same investor cannot usually access an offset. The interest is fixed, deductible, and predictable. The $50,000 sits in a savings account instead, earning interest that is fully taxable. At 4.5 per cent, that account generates $2,250 in interest income, taxed at 37 per cent, leaving $1,418 after tax. The net position depends on whether the fixed rate is lower than the variable rate, and by how much.

Why Lenders Limit Offsets on Fixed Rate Products

Lenders price fixed rate loans by locking in their own funding cost through wholesale swap contracts. They know in advance how much interest the loan will generate over the fixed term. An offset account introduces uncertainty because the balance can move daily, changing the effective loan balance and the interest payable.

When a lender cannot predict the interest with confidence, they cannot hedge the funding cost accurately. The risk becomes unmanageable at scale, so most lenders simply do not offer offsets on fixed products, or they offer a non-functional offset that does not reduce interest during the fixed period.

A small number of lenders allow what is called a non-effective offset, where the account is linked but does not reduce the interest calculated during the fixed term. At the end of the fixed period, the lender calculates what the offset would have saved and applies that saving as a lump sum credit or adjustment. This structure protects the lender's hedge but adds complexity for the borrower, and the benefit is deferred.

How Fixed Rates Affect Claimable Interest Deductions

Interest on an investment loan is deductible under Section 8-1 of the Income Tax Assessment Act 1997, provided the borrowing is used to purchase or hold an income-producing asset. Fixing the rate does not change the deductibility of the interest. What changes is the certainty.

On a variable rate loan, the interest cost fluctuates with rate movements. On a fixed rate loan, the interest is set for the term. Both are deductible in the year they are incurred. The choice between variable and fixed does not alter the tax treatment, it alters the cash flow predictability and the risk of rate rises during the fixed period.

Some investors assume that fixing a portion of the loan and leaving the rest variable creates a tax complication. It does not. Each split is a separate facility. Interest on the fixed portion is deductible, and interest on the variable portion is deductible. If one portion has an offset attached and the other does not, the deduction is calculated separately for each split based on the actual interest charged.

What Happens to Your Offset When You Refinance a Fixed Loan

Refinancing an investment loan during a fixed rate period usually triggers break costs. These are calculated based on the difference between the fixed rate on your loan and the current wholesale rate the lender can earn by redeploying the funds. If rates have fallen since you fixed, the break cost can be significant.

Break costs are generally deductible over the remaining term of the original fixed period, or over five years, whichever is shorter. They are not deductible in full in the year they are incurred unless the remaining term is less than 12 months. This is set out in Taxation Ruling TR 2021/4.

If you refinance from a fixed loan without an offset to a variable loan with an offset, the offset becomes functional immediately. The new loan is variable, so the lender has no hedge to protect and no reason to restrict the offset. You can deposit funds and reduce interest from day one. The benefit is the interest saved, less the tax you would have received as a deduction on that interest, minus any break cost paid to exit the fixed loan.

In our experience, investors in areas like Epping often refinance when the fixed term ends rather than during it, specifically to avoid break costs. Epping has a high proportion of dual-income households and a strong mix of upgraders and investors near the metro station and town centre precinct. Many of those investors fix a portion of the loan for certainty during the first few years, then review the structure when the fixed term expires.

Does Splitting Between Fixed and Variable Let You Keep an Offset?

Yes. Splitting the loan allows you to fix part of the debt for rate certainty and keep part of it variable with an offset attached. This is the most common structure when an investor wants some protection from rate rises but still wants access to an offset for surplus cash.

A typical split might be 50 per cent fixed and 50 per cent variable, or 70/30, depending on how much rate protection the investor wants and how much cash they expect to hold in the offset. The fixed portion does not have an offset, and the variable portion does. The offset reduces the interest charged on the variable portion only.

Consider an investor with a $600,000 loan split 60 per cent fixed at 5.8 per cent and 40 per cent variable at 6.4 per cent. The fixed portion is $360,000, and the variable portion is $240,000. They hold $40,000 in an offset linked to the variable split. The offset reduces the variable balance to $200,000 for interest calculation purposes. Interest is charged on $360,000 at 5.8 per cent and $200,000 at 6.4 per cent. Both components remain deductible.

The decision about how to split depends on rate outlook, cash flow, and how much flexibility the investor wants. There is no universal answer. We regularly see investors in Epping, particularly those buying units or townhouses near the metro or in the Epping North and Dence Park areas, opt for a split structure because they want predictable repayments on part of the loan but do not want to lock away all their liquidity.

Fixed Rate Investment Loans and Interest-Only Repayments

You can fix an investment loan on an interest-only basis, and many investors do. Interest-only repayments keep the loan balance stable and maximise the deduction relative to the cash outlay. The principal is not being repaid, so the amount of deductible interest remains constant throughout the interest-only period.

Lenders typically allow interest-only terms of up to five years on investment loans. After that, the loan reverts to principal and interest unless you apply to extend the interest-only term. Extending is not automatic, and the lender will reassess serviceability, LVR, and rental income at that time.

Under APS 112, a loan with an interest-only period longer than five years and an LVR above 80 per cent is classified as non-standard, which attracts a higher risk weight and higher capital cost for the lender. Most lenders will not offer that structure. If your LVR is below 80 per cent, a longer interest-only term may be available, but it is not common.

Some lenders allow you to fix the rate and keep the loan interest-only during the fixed term. Others require principal and interest repayments during any fixed period. The combination of fixed rate and interest-only is available, but not from every lender. It depends on their appetite for investment lending and their prudential settings.

If you need ongoing interest-only repayments and want the option to fix part of the loan, check with your broker which lenders will accommodate both features on the same facility. It narrows the field, but the structure is still accessible with the right investment loan options and a clear rationale for the interest-only term.

Should You Fix an Investment Loan Without an Offset?

It depends on your cash position and rate outlook. If you do not expect to hold surplus funds in an offset, fixing part or all of the loan removes the rate risk and locks in your deduction. If you do expect to hold cash, keeping the loan variable with an offset attached gives you flexibility and a modest after-tax saving on the interest.

Fixing without an offset makes sense when rate protection is the priority and cash flow is tight. The fixed rate is typically lower than the variable rate at the time you lock it in, so your repayments drop, your deduction is known, and your budgeting is simpler. If rates rise during the fixed term, you benefit. If they fall, you pay more than you would have on a variable loan, and you may face break costs if you want to exit early.

For Epping investors, many of whom are purchasing apartments or townhouses as their first or second investment property, fixing a portion of the loan during a rising rate environment has been a common approach. The suburb sits within the City of Parramatta local government area and has seen consistent demand from renters working in Macquarie Park, Chatswood and the CBD, supported by the metro link. Investors in that cohort often fix 50 to 70 per cent of the loan to manage repayment risk and keep the rest variable in case they want to use an offset or make extra repayments without penalty.

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