The Easiest Way to Use Fixed Rates and Offsets Together

Why Investment Loans Don't Combine Fixed Rates with Offset Accounts

Fixed rate investment loans do not support offset accounts. The lender has locked in a cost of funds and passed that certainty to you at a fixed rate. An offset account would allow you to reduce the interest charged without reducing the principal balance, which creates an unpredictable cost for the lender and undermines the fixed rate contract.

This creates a choice for investors. A fixed rate protects borrowing costs during a rising rate cycle and makes cash flow predictable. An offset account preserves access to liquidity and allows interest-free savings to reduce the loan balance without formal prepayments. Many New Farm investors hold cash for future renovation works, land tax liabilities or deposit reserves for additional properties, and parking that capital in an offset account attached to a variable rate portion of the loan maintains both flexibility and tax efficiency.

A split loan structure divides the total borrowing into two facilities: one portion fixed, the other variable with an offset account attached. This allows you to lock in a rate on the majority of the loan while retaining access to liquidity on the variable portion.

Structuring a Split Between Fixed and Variable Portions

A common split is 70 per cent fixed and 30 per cent variable with offset. The fixed portion provides rate certainty and stabilises repayments. The variable portion, typically smaller, is linked to an offset account where surplus cash can sit and reduce interest charges without locking the funds away.

Consider an investor who refinances a rental property in New Farm. The loan is $600,000, and the investor expects to hold $80,000 in cash over the next two years for body corporate levies, land tax, and a possible bathroom renovation. Fixing $420,000 provides certainty on the bulk of the debt. The remaining $180,000 sits on a variable rate with an offset account attached. The $80,000 in cash offsets the variable portion, meaning interest is only charged on $100,000 of that variable balance. The investor retains full access to the $80,000 at any time, and because the loan is for investment purposes, the interest on the full $600,000 remains deductible.

The fixed term is typically between one and five years. Shorter terms reduce break cost risk if circumstances change. Longer terms extend rate certainty but lock you into that rate even if variable rates fall.

How Interest Deductibility Works Across Both Portions

Interest on both the fixed and variable portions of an investment loan remains fully deductible, provided the borrowed funds were used to acquire or hold an income-producing property. The presence of an offset account does not affect deductibility. The offset balance reduces the interest charged, but the deduction is calculated on the interest actually paid, not on the loan balance.

If you deposit personal savings into the offset account, those funds reduce the interest charged on the variable portion of the loan. The reduced interest charge flows through to your tax return as a lower deduction, but the benefit of paying less interest typically exceeds the modest reduction in the deduction. The key is to ensure the loan itself was drawn for investment purposes. Redrawing funds for private use, or topping up the loan for non-investment expenses, can create a mixed-purpose loan and compromise the deductibility of interest on the entire facility.

In our experience, the split that works depends on how much liquidity you need and how long you expect to hold that cash. Investors with stable rental income and minimal cash reserves often fix 80 to 90 per cent of the loan. Investors expecting lumpy expenses or planning to purchase another property within two years typically fix 50 to 70 per cent and hold the remainder variable with a larger offset balance.

Break Costs and Why They Matter When Fixing Part of the Loan

Break costs apply when you repay, refinance, or increase repayments on a fixed rate loan before the fixed term ends. The cost is calculated based on the difference between your fixed rate and the lender's current wholesale funding rate for the remaining term. If rates have fallen since you fixed, the break cost can be substantial. If rates have risen, the break cost is usually zero.

Because only part of your loan is fixed under a split structure, break costs apply only to that fixed portion. The variable portion can be repaid, refinanced, or increased without penalty. This reduces your exposure compared to fixing the entire loan. If you need to sell the property or refinance to access equity before the fixed term ends, the break cost is calculated on the fixed portion only, and you can often retain the fixed rate by porting it to a new property with the same lender.

We regularly see investors underestimate break costs when fixing for three or more years. If you anticipate selling, subdividing, or refinancing to fund another purchase, fixing a smaller portion or choosing a shorter fixed term reduces future cost and complexity. The fixed rate expiry process is straightforward when the term ends naturally, but unwinding a fixed loan early can erode the savings the fixed rate was meant to provide.

Using the Offset Account to Manage Cash Flow Between Properties

An offset account attached to the variable portion of an investment loan allows you to centralise surplus cash without losing access or creating a mixed-purpose loan. Rental income from the property can be deposited into the offset account, along with any other savings earmarked for investment purposes. The balance offsets the variable loan portion, reducing interest charges daily.

For New Farm investors building a portfolio, this structure supports efficient cash flow between properties. Rental income from one property can sit in the offset account attached to another property's loan, reducing interest on that loan while remaining fully accessible for future deposits, renovations, or settlement costs. The interest saved is equivalent to earning interest at the loan rate, but without generating assessable income or requiring a separate savings account.

The offset account does not need to be in the same name as the loan, provided the lender's policy allows it. Some lenders allow offsets to be linked across joint and individual borrowers, which can be useful for couples or family structures where income is earned in different names.

What Happens at the End of the Fixed Term

When the fixed term ends, the fixed portion of the loan automatically reverts to the lender's standard variable rate unless you proactively refix or refinance. The standard variable rate is typically higher than the lender's advertised variable rate for new borrowers, and no offset account is attached unless you request a product switch.

At this point, you can refix the same portion for another term, switch the entire loan to variable with offset, or refinance to a different lender. If your circumstances have changed or if you have built equity in the property, refinancing may provide access to better rates or additional features. The investment loans landscape shifts regularly, and a loan that was appropriate two or three years ago may no longer be the most suitable option.

If you choose to refix, you can adjust the split at that time. Many investors reduce the fixed portion as they build equity and require less cash flow protection, or increase the fixed portion if they anticipate further rate rises. The offset account on the variable portion remains active throughout, regardless of what you do with the fixed portion.

Rental Income, Vacancy and Holding Costs in New Farm

New Farm's proximity to the CBD, riverfront access and established dining and cultural amenities support consistent rental demand, particularly for one and two-bedroom apartments near Brunswick Street and the river precinct. Vacancy periods are typically short, but rental income alone rarely covers the full cost of holding an investment property when body corporate fees, council rates, land tax, insurance and loan repayments are included.

An offset account allows you to hold reserves for periods between tenants without those funds sitting idle in a transaction account. If a tenant vacates and the property remains vacant for four to six weeks, the cash in the offset account can be drawn to cover the shortfall in repayments without needing to access a redraw facility or a separate line of credit. Once the property is re-tenanted, surplus rental income can be redeposited into the offset account to rebuild the reserve.

Body corporate fees in New Farm apartment complexes typically range from $1,500 to $3,500 per quarter depending on the age of the building and the facilities provided. Older walk-up blocks on the eastern side of the suburb generally sit at the lower end, while full-service buildings with pools, gyms and concierge near the river sit at the upper end. These costs are deductible, but they create a cash flow requirement that an offset account helps manage.

Why Loan Structure Matters More After July 2027

From 1 July 2027, rental losses on residential investment properties acquired after 7:30pm AEST on 12 May 2026 cannot be offset against salary or wage income. Those losses can only be offset against other residential rental income or carried forward. Properties purchased before that date, and new builds that increase the dwelling count, retain access to negative gearing under the existing rules.

For investors affected by the quarantining rules, cash flow becomes a more immediate concern. A fixed rate on the majority of the loan stabilises repayments, and an offset account reduces the interest charged on the variable portion, lowering the overall holding cost. The tax benefit of the rental loss is deferred, so reducing the size of the loss through interest savings has a direct cash flow benefit.

For investors purchasing properties grandfathered under the existing rules, the offset account preserves liquidity without compromising the deductibility of interest. The ability to offset rental losses against other income remains intact, but the flexibility to access cash without triggering a redraw or creating a mixed-purpose loan remains valuable regardless of the tax treatment.

If you are considering refinancing an existing investment property, the loan structure can be adjusted without affecting the grandfathering status of the property. The date of acquisition determines the tax treatment, not the date of the loan. Switching from a fully variable loan to a split structure, or from a fixed-only loan to a split with offset, does not change the tax outcome but can improve cash flow and flexibility.

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