Everything You Need to Know About Fixed Rate & Offset

Why Fixed Rate Home Loans and Offset Accounts Don't Work Together

Fixed rate home loans lock in your interest rate for a set period, but they don't permit offset accounts. Lenders calculate the fixed rate based on the full loan amount earning interest for the entire fixed term. An offset account would reduce that interest income daily, which conflicts with how fixed rates are priced and funded.

Consider a borrower refinancing to fund a granny flat build. They want rate certainty on the construction drawdowns but also want to park rental income in an offset to reduce interest on the variable portion. A fixed-only loan means that rental income sits in a savings account earning taxable interest at a lower rate than the mortgage interest they're paying. That rental income could save them more if it offset the loan balance instead.

How a Split Loan Structure Solves the Problem

A split loan divides your total borrowing into two separate loan accounts: one fixed and one variable. The fixed portion locks in a rate, and the variable portion links to an offset account. Both portions are secured against the same property and settle at the same time.

For a $400,000 loan, you might fix $250,000 at a known rate and keep $150,000 variable with an offset account attached. If you hold $30,000 in the offset, you're charged interest on $120,000 instead of $150,000. The fixed portion remains unaffected.

We regularly see clients building a granny flat who split the loan 60/40 or 70/30 depending on how much cash flow they expect to hold. The fixed portion covers the construction cost where repayments need to be predictable, and the variable portion with offset absorbs rental income or savings as they accumulate. That structure gives both stability and flexibility without requiring two separate properties or lenders.

What Happens to Your Offset Account When the Fixed Term Ends

When the fixed term expires, that portion of the loan reverts to a variable rate unless you choose to refix. At that point, you can link the previously fixed portion to the same offset account or leave it separate depending on your cash flow.

If you've built up $50,000 in your offset over a three-year fixed term, that balance has been reducing interest on the variable portion only. Once the fixed portion reverts to variable, the full $50,000 offsets a larger combined variable balance, which increases your daily interest saving. You don't need to open a new offset account or reapply. The loan structure adjusts automatically at reversion unless you elect to refix that portion again.

Some borrowers refix part of the loan again and leave the rest variable with the offset attached. Others move the entire balance to variable with offset once they've accumulated enough cash flow to make the offset more valuable than rate certainty. Your decision depends on your cash reserves and whether you expect rates to rise or fall after the fixed term ends.

How Interest is Calculated on Each Portion of a Split Loan

Interest on the fixed portion is calculated daily on the full fixed loan balance and charged monthly at the fixed rate. Interest on the variable portion is also calculated daily, but the balance is reduced by whatever sits in your linked offset account before interest is applied.

If your variable portion is $150,000 and your offset holds $40,000, you're charged interest on $110,000 that day. If the offset balance increases to $55,000 the next day, you're charged interest on $95,000. The fixed portion continues to accrue interest on its full balance regardless of what's in the offset.

This daily calculation means every dollar in your offset reduces interest from the day it's deposited. Rental income from a granny flat paid into the offset on the first of the month saves more interest than the same income paid on the 28th, even within the same billing cycle. For a variable portion at 6.5 per cent, each $10,000 in the offset saves roughly $650 per year in interest, though this depends on the rate at the time.

Choosing the Right Fixed and Variable Split Ratio

The right split depends on how much cash flow you expect to hold in the offset and how much rate certainty you need. A larger fixed portion protects more of your repayments from rate rises but reduces the loan balance your offset can work against. A larger variable portion with offset gives you more interest saving potential but exposes more of your loan to rate movements.

A borrower funding a $120,000 granny flat build on top of a $300,000 existing mortgage might fix $300,000 to maintain predictable repayments on the main dwelling and keep the $120,000 variable with offset. If the granny flat generates $450 per week in rent, that's roughly $23,000 per year. After holding back some funds for maintenance and vacancies, they might keep $15,000 to $18,000 in the offset on average. That balance works against the $120,000 variable portion, reducing the interest charged on that portion by 12 to 15 per cent of the balance. The fixed portion remains stable regardless of rental income.

Another approach is to fix 50 per cent and keep 50 per cent variable if you're unsure how much cash you'll hold. You can adjust the split when you refinance or when the fixed term ends, but you can't change it mid-term without breaking the fixed portion and paying break costs.

Can You Pay Extra on a Fixed Portion Without a Penalty

Most fixed rate loans allow up to $10,000 or $20,000 in extra repayments per year without penalty, though this varies by lender and product. Anything above that limit incurs break costs if you're paying down the fixed portion before the term ends. Break costs apply when you pay out the fixed loan early, whether by selling, refinancing, or making large lump sum payments beyond the allowable limit.

If you're likely to receive a large lump sum during the fixed term, such as an inheritance, sale proceeds, or bonus, keep more of your loan variable so the lump sum can be paid down or parked in the offset without penalty. If you fix too much and then want to pay it down, you'll either pay break costs or leave the money sitting in an offset that can't reduce the fixed portion.

Some lenders allow unlimited extra repayments on the variable portion at any time. That portion can also be reduced by the offset balance daily, so holding surplus funds in the offset rather than paying them directly onto the variable loan gives you the same interest saving with more access to the cash if needed.

Why You Can't Move Money Between Fixed and Variable Portions Mid-Term

Once your split loan settles, the fixed and variable portions are separate loan accounts. You can't move funds from the fixed portion to the variable portion or vice versa without refinancing or paying out one portion. The fixed portion is a contract for a set term at a set rate on a set balance, and altering that balance triggers break costs unless the change falls within the allowable extra repayment limit.

If rates drop significantly after you fix, you might want to reduce the fixed portion and increase the variable portion to take advantage of the lower rate. That requires refinancing or breaking the fixed contract. If rates rise after you fix, your fixed portion is protected, but you can't retrospectively increase it without applying for additional borrowing.

The split ratio you choose at settlement is the split you're working with until the fixed term ends or you refinance. That's why cash flow forecasting matters before you commit to a split structure. If you're building a granny flat and expect $20,000 in rental income per year, fixing 80 per cent and keeping 20 per cent variable might leave your offset underutilised. Fixing 60 per cent and keeping 40 per cent variable gives the offset more loan balance to work against.

When a Split Loan Makes Sense and When It Doesn't

A split loan works well when you want some repayment certainty but also expect to hold cash flow that can reduce your interest. It's often suited to borrowers funding a granny flat who will receive rental income, owner-occupiers with variable income such as bonuses or commissions, or anyone refinancing who wants to hedge against rate movements without losing offset flexibility.

A split loan is less useful if you don't expect to hold any meaningful cash flow in an offset. If your income covers expenses with little left over, a fully fixed loan gives you maximum repayment stability without the complexity of managing two loan portions. A split loan also adds a small amount of administrative overhead because you'll have two loan accounts, two sets of statements, and two interest rates to track. For most borrowers funding a granny flat build, that's a minor trade-off for the flexibility and interest saving the offset provides.

Call one of our team or book an appointment at a time that works for you. We'll look at your build cost, expected rental income, and cash reserves to work out a split ratio and loan structure that fits your situation without locking you into a fixed rate that limits your options.

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