This has been reported elsewhere I believe. This is really odd, but it only does this if it is bound to the middle mouse button. If you bind it to the right mouse button instead you can still use it without the zoom out. Additionally binding the freelook toggle to right mouse means you don’t get the crash when you use the Next Pilot Position button, typically bound to the yoke hat up switch. And you can still use the flight controls while looking around with the freelook hold, usually bound to right click, doesn’t allow for.
The only downside is you have to right click twice, to enable/disable it, but the benefits of this far outweigh this minor niggle IMHO.