Fixed Rates and Offsets on Investment Loans

Most investment loans settle on either a variable rate with an offset or a fixed rate without one.

The reason comes down to how lenders calculate interest on a fixed loan. A fixed rate is priced at the time you lock it in, based on the loan amount, term and repayment type. Adding an offset means the lender would need to reprice the loan every time your balance changes, which defeats the purpose of fixing. Some lenders do offer fixed loans with offset, but the structure usually involves restrictions, a higher rate, or both.

Can You Fix Part of an Investment Loan and Keep an Offset on the Rest?

Yes, and this is the approach most property investors use when they want rate certainty without losing offset flexibility.

You split the loan into two accounts. One account is fixed without an offset, the other stays variable with an offset attached. Each account sits under the same security, so you're not refinancing or creating a second property loan. You're dividing the total borrowing into two portions.

Consider a Karrinyup investor with a $600,000 loan on a unit in the Carine Glades precinct. They fix $400,000 for three years at a locked rate and leave $200,000 on variable with a full offset. They build $50,000 in the offset over time. Interest is charged on $150,000 of the variable portion and the full $400,000 of the fixed portion. The fixed account gives them predictable repayments on two thirds of the debt. The variable account lets them reduce interest as they save.

This split strategy works well for investors who want some protection from rate rises but still plan to park rental income, tax refunds or surplus cash in an offset. The proportion you fix depends on how much volatility you're willing to carry on the variable side and how much liquidity you expect to hold.

How Does Interest Deductibility Work Across a Split Loan?

Each portion of the loan is deductible separately, provided both portions were used to acquire or hold the investment property.

Interest on the fixed portion is deductible in full. Interest on the variable portion is also deductible in full, even if an offset reduces the interest charged. The offset itself doesn't reduce your deduction, it reduces the interest you're charged in the first place. So if the variable account would have charged $10,000 in interest but your offset brings that down to $6,000, you claim $6,000.

If you deposit non-investment funds into the offset, such as your salary or savings from other sources, that doesn't change the deductibility. The offset is not part of the loan. It's a separate transaction account that reduces the balance on which interest is calculated. What matters for deductibility is what the original loan was used for, not what you later deposit into the offset.

This is why investment loans are usually structured with offsets on the variable portion only. You maintain full deductibility while still getting the interest saving benefit of any cash you hold.

Do Lenders Treat Fixed and Variable Portions Differently for Serviceability?

Not for the initial approval, but they may when you try to refinance or restructure before the fixed term ends.

When you apply for a split loan, the lender assesses your capacity to service the total loan amount at a rate that includes the serviceability buffer. That assessment applies whether you fix part of the loan or keep it all variable. Once approved, you choose how to split it.

Where the fixed portion becomes relevant is if you want to break the fixed rate before it expires. Most lenders charge break costs when you repay, refinance or restructure a fixed loan early. The cost is based on the difference between the rate you locked in and the rate the lender can now earn by redeploying that money. If rates have fallen since you fixed, the break cost can be substantial. If rates have risen, the break cost may be zero or close to it.

Break costs apply to the fixed portion only. The variable portion with the offset can be refinanced or restructured at any time without penalty. This is another reason many Karrinyup investors fix only part of their loan. It leaves them with flexibility to access equity, switch lenders or adjust their structure if their circumstances change before the fixed term ends.

What Happens to the Offset When the Fixed Term Ends?

The fixed portion reverts to variable, and you can attach an offset to it at that point if you want to consolidate the accounts.

When a fixed term expires, the loan automatically moves to the lender's standard variable rate unless you choose to refix or refinance. At that point, the fixed and variable portions are both on variable rates. You can merge them into a single account with one offset, or keep them separate.

Most investors review their structure when the fixed term ends. If you've built up a large offset balance, it might make sense to consolidate everything under one variable loan and use the offset to manage interest. If rates have dropped and you want certainty again, you might refix part or all of the loan. If your lender's rates are no longer suitable, it's a natural time to refinance to another lender without break costs.

The key point is that the end of the fixed term is a reset point. You're not locked into the same structure you started with, and the offset you've been using on the variable portion can be applied more broadly once the fixed portion rolls off.

Should You Fix an Investment Loan in the Current Environment?

That depends on your cash flow, your outlook on rates, and how much income you expect to park in an offset.

Fixed rates suit investors who want certainty on repayments and don't expect to hold large amounts of surplus cash. If you're negatively geared and relying on salary or other income to cover the shortfall, fixing part of the loan means you know exactly what that shortfall will be for the fixed period. That makes budgeting and tax planning more predictable.

Variable rates with an offset suit investors who generate strong cash flow, receive irregular lump sums, or want the ability to redraw or restructure without penalty. If you're holding $30,000 to $50,000 in accessible cash at any given time, the interest saving from an offset will often outweigh the rate certainty of a fixed loan, especially if fixed rates are higher than variable rates at the time you're deciding.

Splitting the loan lets you do both. You fix enough to smooth out your repayments and leave enough on variable to benefit from any surplus cash. For Karrinyup investors with exposure to the Carine or Gwelup employment precincts, where rental demand tends to stay consistent, a split structure provides a buffer against rate rises while keeping liquidity for property costs or portfolio growth.

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