Private Lending Costs in Australia: Interest, Fees and Net Loan Proceeds Explained
Private lending costs in Australia can include interest, establishment fees, valuation expenses, legal costs and discharge charges. Depending on the loan agreement, there may also be minimum-interest requirements, extension fees or charges if the loan defaults.
For borrowers comparing property-secured business finance, the interest rate is only one part of the decision. The more useful questions are: how much money will be available after deductions, what will the finance cost over the intended term, and how much must be repaid to exit the loan?
A private loan should be assessed against the funding need it is intended to solve. A facility that settles quickly but leaves a business short of usable funds may not achieve its purpose. Equally, a loan with manageable initial costs can become difficult to repay if the planned sale or refinance takes longer than expected.
This guide explains how to assess a private lending proposal before proceeding.
What costs should you check in a private loan?
Ask for a written breakdown covering the entire transaction, from application through to repayment. Each charge should state its amount or calculation method, when it becomes payable and whether it is deducted from the advance or paid separately.
Depending on the facility, costs may include:
Establishment fees: charges for setting up the loan, sometimes calculated as a percentage of the facility.
Interest: calculated using the rate, balance and payment method specified in the agreement.
Valuation fees: expenses associated with assessing the security property.
Legal fees: potentially including lender documentation costs and the borrower’s independent legal advice.
Search and registration expenses: costs associated with checking and registering the security.
Broker or adviser fees: where separately agreed and payable by the borrower.
Discharge or exit fees: charges associated with closing the facility and releasing the security.
Extension or variation fees: potential charges if the lender agrees to change the term or other conditions.
Not every facility includes every fee. The purpose of the breakdown is to identify the costs that actually apply to your proposed transaction.
Also ask which expenses remain payable if the loan does not settle. A valuation or legal expense may already have been incurred even if the application does not proceed.
What is the difference between the gross loan and net loan proceeds?
The gross loan is the amount advanced before applicable deductions. Net loan proceeds are the funds remaining after deductions such as fees, retained interest and any existing debts being repaid at settlement.
The terminology used in a term sheet can vary. A “facility limit” may also include amounts reserved for future drawdowns or interest, so it should not automatically be treated as cash available immediately.
For a business owner, the practical starting point is the amount required for the actual purpose.
If a supplier must receive $250,000, an offer described as a $250,000 loan may be insufficient once costs are deducted. The funding request should explain that the business needs $250,000 net for the supplier payment, with transaction costs separately identified.
A hypothetical net-proceeds example
Assume a private loan has the following structure:
Gross advance: $400,000
Existing business debt repaid at settlement: $250,000
Upfront fees and transaction costs deducted: $12,000
Interest retained at settlement: $24,000
The remaining cash would be:
$400,000 − $250,000 − $12,000 − $24,000 = $114,000
Although the gross advance is $400,000, only $114,000 remains for the borrower’s additional funding requirement.
The $250,000 debt payout is not a new borrowing fee. It reduces cash received because part of the advance is being used to refinance an existing liability.
These figures are illustrative only. They are not Assurity Capital rates, fees, lending terms or an offer of finance.
How does the interest structure affect a private loan?
The payment structure determines when interest affects cash flow and how it influences the amount required at repayment.
Interest paid during the loan term
With serviced interest, the borrower makes interest payments during the term, commonly monthly where the agreement provides for this.
This structure requires sufficient ongoing cash flow. Ask whether quoted payments are fixed estimates or vary with the number of days in a period, the drawn balance or changes permitted under the agreement.
Interest retained at settlement
With retained or prepaid interest, an amount is withheld from the advance to cover a specified interest period.
This can reduce the cash available at settlement. It does not make the interest free, and it does not necessarily cover a period beyond the original loan term.
Ask how the retained amount is applied and whether any unused portion is refundable if the loan is repaid early.
Interest added to the loan balance
Capitalised interest is added to the debt rather than paid from current cash flow.
This can increase the amount needed to discharge the loan. Ask whether interest is charged on previously capitalised interest, when amounts are added and whether the facility has sufficient capacity to accommodate them.
The term sheet should explain the mechanism precisely. Retained interest and capitalised interest should not be assumed to produce the same cash advance or repayment balance.
How can you compare private lending interest rates properly?
Start by confirming whether the rate is quoted per month or per annum.
As a mathematical illustration, 1% per month multiplied by 12 equals a nominal annual rate of 12%. That calculation does not include fees or establish the effective annual cost.
Compounding and the timing of payments can change the result.
Then confirm the balance on which interest is calculated. Depending on the agreement, this may involve the amount advanced, the outstanding drawn balance or another defined amount.
Useful questions include:
Is interest calculated daily or using another method?
When does interest begin accruing?
Does a minimum-interest period apply?
Are there separate fees on the facility limit?
Does the repayment calculation include interest beyond the proposed discharge date?
Are additional charges triggered by late payment or default?
Two offers displaying the same headline rate can produce different dollar costs. Compare them using the same required net funding amount and expected repayment date.
How do loan-to-value ratios affect available funds?
A loan-to-value ratio, or LVR, compares the relevant secured debt with the lender’s accepted property value.
For a second mortgage, the existing first mortgage must be considered alongside the proposed additional debt. Property equity alone does not establish how much cash a borrower can receive.
A hypothetical second mortgage calculation
Assume:
Accepted property value: $1,200,000
Illustrative combined lending limit: 70%
Existing first mortgage debt: $600,000
The illustrative combined debt limit is:
$1,200,000 × 70% = $840,000
Subtracting the existing mortgage gives:
$840,000 − $600,000 = $240,000
That $240,000 is an initial calculation of potential debt capacity under the assumptions. It is not necessarily the available cash advance.
Fees, interest allowances, other secured obligations, the existing lender’s position and the assessment of the transaction can reduce the funds available.
The 70% figure is an example only, not an Assurity Capital lending commitment. Confirm how the lender measures existing exposure and accounts for interest and fees.
Does a second mortgage cost less than refinancing?
There is no universal answer.
A second mortgage may allow an eligible borrower to retain an existing first mortgage while arranging additional finance. However, the borrower must consider the second loan’s costs and its interaction with the existing facility.
A full refinance involves replacing existing lending. Its cost comparison should include the amount being refinanced, any discharge expenses, new establishment costs and the proposed term.
Ask for both structures to be compared using:
The same amount of usable additional funding.
The same expected repayment date.
All relevant establishment and discharge costs.
Interest on every loan that remains in place.
Any costs associated with changing the existing facility.
A smaller additional loan with a higher rate may produce a different overall cost from refinancing a much larger debt. The actual figures determine which structure is more economical and workable.
Why does the exit strategy matter when assessing costs?
The exit strategy is the identified source of money that will repay the private loan.
A borrower planning to sell a property should estimate the funds remaining after existing mortgages, selling expenses and other settlement obligations. A borrower planning to refinance should assess whether the replacement loan is realistically obtainable within the required timeframe.
The repayment plan should cover the expected discharge amount, rather than just the cash originally received.
Consider three scenarios:
Repayment on the planned date: What is the expected total cost and payout?
Earlier repayment: Do minimum-interest provisions or other charges change the expected saving?
Delayed repayment: What additional interest, fees or approval requirements could arise?
An extension should never be assumed. If the planned exit depends on another lender approving finance, an unsigned sale or an uncertain business receipt, that uncertainty belongs in the assessment before the loan begins.
What happens if you repay a private loan early?
Early repayment does not automatically mean interest is payable only for the exact period the funds were used.
Some agreements include a minimum-interest period or other early repayment provisions. Where interest has been retained upfront, the treatment of any unused amount depends on the contract.
Before accepting an offer, request an indicative payout for the date you realistically expect to repay. If an early sale is possible, request an additional calculation for that scenario.
For example, a borrower expecting repayment after three months should understand the consequences of accepting a facility with six months of minimum interest.
What should you prepare before requesting private finance?
A clear funding request helps distinguish the cash requirement from the overall facility needed to complete the transaction.
Prepare:
The net amount needed and its specific business or commercial purpose.
The property address, property type and estimated value.
Current mortgage statements and details of other secured debts.
The borrowing entity and property ownership structure.
The deadline for settlement and the reason for that deadline.
The proposed repayment source and expected timing.
Supporting information for the sale, refinance or business receipt.
Any known arrears, maturity dates or other issues affecting the transaction.
State the cash requirement directly. For example: “The business needs $180,000 available for supplier payments after settlement deductions.”
This is more useful than requesting a $180,000 facility without explaining whether that figure includes costs.
Questions to ask before accepting a private loan offer
Before proceeding, make sure the written proposal answers these questions:
How much cash will be available for the stated purpose?
Which debts and costs will be paid from the advance?
How is interest calculated and paid?
What payments must be made during the term?
What is the estimated payout on the planned exit date?
What changes if repayment occurs earlier or later?
Which fees are payable if the transaction does not proceed?
What conditions remain outstanding before funding?
What security and guarantees are required?
What happens if the borrower cannot meet the agreement?
Property-secured lending places the security property at risk if obligations are not met. Independent legal advice can help the borrower understand the documents, security arrangements and consequences before signing.
Discuss your property-secured funding requirements with Assurity Capital
Assurity Capital is an Australian private lender considering property-secured finance for eligible business, investment and commercial purposes.
Its lending solutions include first mortgages, second mortgages, bridging finance and secured business loans. Applications are assessed on the transaction, property security, debt position, funding purpose and repayment strategy.
When discussing your scenario, provide the net funds required, existing mortgage details, settlement deadline and proposed exit. These details help establish whether a potential facility can meet the actual funding need.
Finance is subject to assessment, acceptable security, documentation and approval. Assurity Capital does not provide consumer-purpose personal loans or owner-occupied home loans.
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