Everything You Need to Know About Fixed Rate Investment Loans

Offset accounts don't typically work with fixed rate investment loans.

Most lenders either don't allow an offset facility on a fixed investment loan at all, or they charge a higher interest rate to include one. The lender locks in their cost of funds when you fix your rate, and an offset account introduces uncertainty they price in or exclude entirely.

Why Lenders Restrict Offsets on Fixed Investment Loans

Lenders price fixed rates based on wholesale funding costs that remain constant over the fixed term. An offset account allows your balance to fluctuate, which means the lender can't predict their net interest margin with certainty. To manage that risk, they either remove the offset option or apply a rate loading that can range from 0.15% to 0.40% higher than a standard fixed rate without offset.

For an investor with a loan amount of $600,000, that premium adds between $900 and $2,400 per year in additional interest. The offset account needs to hold a consistent balance large enough to generate savings that exceed that premium before it delivers any benefit.

The Split Loan Structure That Retains Flexibility

Investors who want rate certainty and offset flexibility typically split their loan between fixed and variable portions. Consider a buyer who secures a property near Centre Road in Bentleigh with a loan of $700,000. They fix $450,000 for three years to protect against rate rises on the bulk of their debt, and keep $250,000 on a variable rate with a full offset account attached.

Rental income and surplus cash sit in the offset, reducing interest on the variable portion. The fixed portion remains unaffected by the offset balance, but it also remains unaffected by rate increases during the fixed period. This approach delivers both protection and access to funds without paying an offset premium on the fixed component.

The variable portion also allows additional repayments without triggering break costs, which becomes relevant if the investor sells the property, receives an inheritance, or redirects surplus income toward debt reduction before the fixed term ends.

How Fixed Rate Break Costs Work on Investment Loans

Break costs apply when you discharge, refinance, or pay down a fixed rate loan before the fixed term expires. The lender calculates the economic loss they incur from breaking the contract, based on the difference between your fixed rate and the current wholesale rate for the remaining term.

If you fixed at 5.2% and wholesale rates have since dropped to 4.5%, the lender would have earned more from your loan than they can now earn by reinvesting the funds. You pay the difference. If wholesale rates have increased since you fixed, the break cost is typically zero because the lender isn't worse off.

Break costs on investment loans are not tax deductible in the year they're paid. They must be apportioned over the remaining term of the loan or five years, whichever is shorter, which reduces their immediate value compared to other claimable expenses.

Interest Only Investment Loans and Rate Structure

Interest only periods allow you to minimise repayments during the investment phase and redirect capital toward other opportunities or deposits on additional properties. Most lenders allow interest only terms of up to five years on investment loans, after which the loan reverts to principal and interest unless you apply for an extension.

Fixed rates on interest only investment loans are typically identical to principal and interest fixed rates from the same lender, though some lenders apply a small premium of 0.05% to 0.10%. The interest only structure doesn't change how the fixed rate itself operates, but it does affect your cash flow during the fixed term.

An interest only loan of $500,000 at a fixed rate of 5.8% costs $24,167 per year in repayments. The same loan on principal and interest costs approximately $35,000 per year. That difference of roughly $10,800 annually can be redirected toward building a deposit for a second property, held in an offset account on a variable portion of a split loan, or retained as a buffer against vacancy periods.

Bentleigh's proximity to Southland Shopping Centre and the Frankston line makes it popular with tenants, but vacancy still occurs. Having lower repayments during the interest only period provides breathing room if the property sits empty for four to six weeks between tenants.

Tax Treatment of Fixed Rate Investment Loan Interest

All interest charged on an investment loan is deductible against rental income, provided the loan is used to purchase, construct, or renovate an income-producing property. The deduction applies whether the rate is fixed or variable, and whether repayments are interest only or principal and interest.

The recent changes to negative gearing from the 2026-27 Federal Budget affect how you use those deductions if you purchased an established property after 12 May 2026. Losses from the property can no longer be offset against wage or salary income from 1 July 2027. Instead, they're quarantined and can only offset rental income or capital gains from residential property. Losses can be carried forward indefinitely, so they're not lost, but the immediate tax benefit is deferred unless you hold multiple rental properties with a net positive position across the portfolio.

Fixed rate interest continues to be deductible in the same way, but the timing and structure of when you can use that deduction has changed for newly acquired established properties. New builds retain the full negative gearing treatment, which is one reason they remain appealing despite typically higher purchase prices relative to land value.

When to Fix Part or All of Your Investment Loan

Fixing makes sense when you want certainty over repayments for budgeting purposes, or when you expect rates to rise and want to lock in current pricing. It's less useful if you plan to sell within the fixed term, need to make large lump sum payments, or want the flexibility to refinance without cost.

For investors building a portfolio, fixing the entire loan amount removes flexibility at a stage where circumstances change frequently. You might want to access equity for a second deposit, sell to reallocate into a different area, or restructure your loans as your borrowing capacity changes with income growth.

A partial fix of 50% to 70% of the loan amount provides rate protection on the majority of your debt while keeping enough on variable to allow for strategic changes without incurring break costs. That portion can also support an offset account where rental income accumulates between expense payments, reducing the interest charged on the variable component.

The choice also depends on the rate differential between fixed and variable loans at the time. If fixed rates sit more than 0.50% above variable, the upfront cost of certainty becomes significant, and you need to be confident that variable rates will rise by more than that margin during the fixed term for the decision to deliver value.

Capital Gains Tax and the Fixed Rate Term

The length of your fixed term doesn't directly affect capital gains tax, but it does influence the timing of when you're likely to sell. Fixed terms of three to five years align with the typical hold period before investors either sell to upgrade or refinance to access equity for further investment.

Under the new CGT rules from 1 July 2027, gains on established properties purchased after Budget night will be taxed at a minimum rate of 30%, with cost base indexation replacing the 50% discount. Gains that accrued before 1 July 2027 remain under the old rules, so the date you bought and the date you sell both matter for calculating tax.

If your fixed term ends in late 2029 and you're considering a sale, the portion of your gain from purchase until 1 July 2027 is taxed under the 50% discount method, and the portion from 1 July 2027 onward uses indexation and the 30% minimum. The longer you hold, the more of your total gain falls under the new regime.

New builds in Bentleigh purchased after Budget night retain the option to use either the 50% discount or the indexed method, whichever is more favourable. That flexibility makes new apartments or townhouses near Patterson station worth evaluating alongside established homes, particularly if you're comparing properties with similar rental yields.

Refinancing a Fixed Investment Loan

Refinancing during a fixed term triggers break costs unless rates have moved in your favour or you're within the final few months of the term. Most lenders allow you to port a fixed rate loan to a new property without break costs, but only if the loan amount and remaining term stay the same, which rarely suits an investor's needs when selling and buying.

If you're locked into a fixed rate that's now well above current market pricing, it's worth calculating whether the break cost is less than the interest saving from refinancing to a lower rate. In some cases, particularly where the fixed term has less than 18 months remaining, the saving from refinancing outweighs the exit cost.

Lenders also calculate break costs differently. Some use a simple interest differential, others use a present value model, and a few apply a flat fee structure for early exit. Before committing to a fixed rate, confirm how that lender calculates break costs and whether they allow partial early repayment without penalty. Knowing this upfront avoids costly surprises if your situation changes.

You can read more about refinancing investment loans and when it makes sense to move your lending to a new lender.

Call one of our team or book an appointment at a time that works for you to discuss how fixed rates, offset accounts, and loan splits apply to your specific investment strategy in Bentleigh.

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