This letter proposes a novel dynamic range extension method using an instantaneous frequency (IF)‐tracking method for heterodyne fibre optic hydrophones (FOHs). IFs are used to compensate for large signal amplitudes in the demodulator. Theoretical analysis and simulation prove the effectiveness of the proposed algorithm. Simulation results achieve at least 19.76 dB dynamic range improvement, demonstrating great potential for extending FOHs for hydroacoustic detection and communication applications.