The Easiest Way to Use Fixed Rates and Offsets Together

Fixed Rates and Offset Accounts Don't Work Together

Fixed rate investment loans do not allow offset accounts. When you fix a portion of your loan, that balance is quarantined for the term, and the lender calculates interest daily on the full fixed amount regardless of cash sitting elsewhere. If you want certainty on repayments and the flexibility of an offset, you need to split the loan into two separate accounts.

Consider a business owner borrowing $700,000 for a rental property in Balgowlah. They fix $500,000 at a locked rate and leave $200,000 variable with a linked offset account. Their operating account balance fluctuates between $50,000 and $120,000 across the quarter. The offset reduces interest on the variable portion only. The fixed portion accrues interest at the agreed rate for three or five years, unaffected by any deposit activity.

The structure matters because business cash flow is rarely static. Splitting the loan lets you quarantine the certainty you need without locking up liquidity you rely on day to day. You decide the proportions based on how much cash you expect to hold and how much rate movement you are willing to wear.

Why Business Owners Split Investment Loans

Business owners typically hold larger cash reserves than wage earners, and those reserves can reduce interest substantially if parked in an offset account. Fixing the entire investment loan removes that advantage. Fixing nothing exposes the full balance to rate increases. A split structure gives you both.

In our experience, clients with trading businesses or professional practices often offset between $80,000 and $150,000 against their variable portion. That might represent quarterly GST, supplier payments, or retained earnings awaiting distribution. The offset saves interest every day the funds sit there, and the money remains available without redraw applications or breaking a fixed term.

The fixed portion anchors your minimum repayment. You know exactly what that component costs each month for the duration of the fixed period. The variable portion fluctuates with rate changes, but the offset cushion absorbs much of that movement. If rates rise by 0.50 per cent, the impact on your repayment is confined to the variable balance minus whatever sits in the offset at the time.

How Lenders Price the Two Loan Splits

Each split is priced separately. The fixed portion attracts a fixed rate, which at the time of writing sits higher than most variable rates but includes no ongoing offset benefit. The variable portion is priced at the lender's standard variable investor rate, with an offset facility included at no additional monthly fee with most lenders.

Lenders do not average the two rates or blend them into a single repayment. You receive two loan accounts under the one security, each with its own interest calculation and minimum repayment. Some lenders let you split into three or more portions if your cash flow or hedging requirements are more complex.

Rate discounts apply to each split based on the full loan amount and your loan to value ratio. A $700,000 loan at 70 per cent LVR receives the lender's standard investor discount across both the fixed and variable accounts. Splitting does not reduce your discount tier or attract additional establishment fees with most lenders, though a handful charge a second valuation fee if the security is revalued mid-term when you refinance or restructure.

Interest Only Repayments and Offset Efficiency

Most investment loans are written on an interest only basis for the first one to five years, which amplifies the value of the offset. When the loan is interest only, every dollar in the offset account reduces the interest charged that day by the daily rate divided by 365. You are not reducing principal, so the offset does not shorten the loan term, but it directly reduces your monthly cash outflow.

A variable split of $200,000 with a $100,000 offset balance means you pay interest on $100,000 only for as long as that balance remains. If your variable rate is 6.50 per cent, the saving is around $540 per month while the full offset amount sits there. That saving increases with the balance and compounds over time if you maintain the offset.

The fixed portion, whether interest only or principal and interest, does not interact with the offset. You make the required monthly payment on the fixed balance regardless of cash held elsewhere. Fixing on an interest only basis reduces the repayment compared to principal and interest, but it does not unlock offset functionality.

Refinancing Before the Fixed Term Ends

Breaking a fixed rate loan before the term expires usually triggers a break cost, calculated by the lender based on the difference between your fixed rate and the wholesale rate the lender can now earn on the funds for the remaining term. If rates have fallen since you fixed, the break cost can be substantial. If rates have risen, the break cost may be zero or the lender may even provide a rebate.

Business owners considering refinancing need to calculate whether the benefit of a lower rate or improved structure outweighs the cost of breaking the fixed portion. The variable split can be refinanced at any time without penalty. The fixed split either needs to be ported to the new lender if they allow it, paid out with the break cost included, or left behind with the original lender while the rest of the loan moves.

Most lenders do not allow fixed rate portability. If you want to consolidate debt, access equity, or move to a lender with offset functionality on newer investor products, you will likely need to wear the break cost or wait until the fixed term ends. One option is to refinance the variable portion immediately and refinance the fixed portion when it expires, though this introduces complexity if both loans are secured against the same property.

Tax Deductibility and Loan Purpose

Interest on borrowings used to acquire or hold a residential rental property is deductible to the extent the property is rented or genuinely available for rent. The deduction applies to both the fixed and variable portions of a split loan, provided the funds are used for the investment property and not redrawn for private purposes.

If you redraw funds from the variable portion or use the offset account to pay down the loan and then redraw for a private expense, that portion of the interest is no longer deductible. Many business owners maintain the offset balance rather than paying down the loan to preserve full deductibility and maintain flexibility. Offset accounts do not create mixed purpose loans because the funds are never paid into the loan itself.

Keep records that trace the use of all borrowed funds. If you refinance or restructure, the purpose of the original borrowing continues to determine deductibility, not the new loan contract. A loan health check every two to three years helps confirm your structure still matches your investment and business cash flow, and that loan purposes remain clear for tax reporting.

Negative Gearing Quarantine and Eligible New Builds

From 1 July 2027, net rental losses on residential investment properties purchased on or after 7:30pm AEST on 12 May 2026 will be quarantined. Those losses can only be offset against other residential rental income or carried forward. Losses cannot be offset against salary, wages, or business income unless the property is an eligible new build or acquired before the cut-off.

Eligible new builds retain full negative gearing under existing rules. A new build is defined as a dwelling constructed on previously vacant land, or a dwelling that increases the total number of dwellings on the site. A knock-down rebuild that replaces one dwelling with one dwelling does not qualify. If you are acquiring an investment property and negative gearing is central to your cash flow, confirm the eligibility of the dwelling with your conveyancer and broker before exchanging contracts.

Split loan structures remain available under the new rules. The quarantine applies to the net rental loss, not to the structure of the loan itself. If your investment property generates a loss after all deductions including interest on both splits, that loss is quarantined if the property was acquired after the cut-off and is not an eligible new build. Properties acquired before 7:30pm AEST on 12 May 2026 continue under existing negative gearing rules until sold.

Choosing the Split Proportion

The proportion you fix depends on your tolerance for rate movement and how much cash you expect to hold in the offset. A conservative approach is to fix 60 to 70 per cent of the loan and leave 30 to 40 per cent variable with an offset. This gives you rate certainty on the majority of the debt while keeping enough variable balance to absorb a meaningful offset.

If you expect to maintain a high offset balance relative to the loan, a smaller fixed portion makes sense. Fixing 40 per cent and leaving 60 per cent variable maximises the offset benefit when you have the cash flow to support it. If your business income is less predictable or you prefer stable repayments, fixing a larger proportion provides more certainty at the cost of reduced offset efficiency.

You can adjust the split when the fixed term expires, but you cannot change it during the fixed period without refinancing and potentially incurring break costs. Most brokers recommend modelling two or three scenarios with different split ratios and offset balances to see how repayments and interest costs behave under different rate environments and cash flow assumptions.

Call one of our team or book an appointment at a time that works for you. We structure split loans for business owners across the Northern Beaches and Australia-wide, and we can model your specific cash flow and risk profile before you commit to a fixed term or loan structure.

Frequently Asked Questions