Capitalised Interest Explained: How It Affects Your Borrowing Capacity in Australia

If you’re exploring financing options for property or business in Australia, you’ve likely come across the term capitalised interest. But what exactly does it mean? And how does it affect the amount you receive and your borrowing capacity?

In this article, we break down capitalised interest in plain terms, compare it to interest-only repayments, and show how each structure influences the money you receive and how lenders assess your ability to borrow.

What Is Capitalised Interest?

Capitalised interest is interest that’s not paid monthly instead, it’s added to your loan balance and repaid in full at the end of the term.

This repayment structure is common in:

• Bridging loans

• First Mortgages

• Short-term business finance

• Second mortgages

• Development loans

It allows you to defer payments during the loan term, which can help with cash flow. However, it also changes how your borrowing power is assessed.

How Capitalised Interest Works

Example:

• Loan amount: $500,000

• Interest rate: 10% per annum

• Loan term: 12 months

• Total interest: $50,000

Instead of paying $4,167 monthly in interest, the $50,000 is added to your balance and paid as a lump sum at the end. So you repay $550,000 in total at the end of the loan.

Capitalised Interest vs Interest‑Only Monthly Payments

Both structures result in the same total interest over time, but the cash flow and borrowing assessment differ. Here’s a practical comparison:

Capitalised Interest

• Interest is either added to the loan or deducted from the advance

• No monthly interest payments

• Larger final repayment at end of term

• Upfront funds received: $450,000

Interest‑Only Repayments

• Interest is paid monthly (e.g. $4,167)

• Principal is repaid at end of term

• Regular monthly payments required

• Upfront funds received: $500,000

Real‑World Example: Comparing Loan Proceeds

Let’s say you’re approved for a 12-month loan of $500,000 at 10% interest.

Option 1: Capitalised Interest

• Interest: $50,000

• Funds advanced: $450,000 (interest withheld or added)

• Monthly repayments: $0

• Repay $500,000 (principal) + $50,000 (interest) at end of term

Option 2: Interest‑Only Loan

• Interest: $50,000 total, paid monthly

• Funds advanced: $500,000

• Monthly payments: $4,167

• Repay $500,000 at end of term

Key Insight: Interest-only loans give you more usable capital upfront, as interest isn’t deducted at settlement.

How Capitalised Interest Affects Borrowing Capacity

Capitalised interest changes how lenders view your ability to repay:

1. Serviceability Assessment

Lenders often model repayments as if interest is paid monthly — even on capitalised interest loans — to ensure you're not overextended.

2. Lower Perceived Cash Flow Strain

Although you're not making monthly payments, lenders still factor in the full interest cost in your borrowing assessment.

3. Exit Strategy Scrutiny

Private lenders will want a clear exit plan — usually through sale, refinance, or another liquidity event.

4. Impact on LVR & Net Proceeds

Because capitalised interest reduces your net loan proceeds, it may slightly alter your Loan-to-Value Ratio (LVR), especially for property-secured loans.

Who Uses Capitalised Interest Loans in Australia?

These loans are commonly used by:

• Property investors renovating and flipping properties

• Builders and developers during the construction phase

• Business owners needing short-term working capital

• Borrowers with fluctuating income who expect future inflows

Each group benefits from cash flow flexibility, especially when monthly repayments aren’t practical.

Interest-Only and Capitalised Interest: A Neutral Comparison

It’s not about which is better — each structure suits different financial scenarios. The key difference is when and how you pay interest:

Feature	Capitalised Interest	Interest-Only Payments
Upfront funds received	Lower (e.g. $450k)	Higher (e.g. $500k)
Monthly repayments	None	Yes (interest only)
Repayment at term end	Gross Loan amount (principal and interest)	Principal only
Cash flow impact	Easier short term	Requires regular payments
Total interest cost	Similar over time	Similar over time

Practical Considerations

Before choosing either structure, think about:

• Do you need maximum funds upfront? Interest-only may suit you better.

• Do you want to avoid monthly commitments? Capitalised interest might be more flexible.

• Do you have a solid exit strategy? Critical for both, but especially capitalised loans.

Need Help Structuring the Right Loan?

Whether you’re exploring bridging loans, caveat loans, or business finance, Innovate Funding can structure a loan that suits your timing, cash flow, and goals.

We specialise in flexible solutions for borrowers across Australia, feel free to run your scenario and contact us.

FAQs

1. What is capitalised interest in a loan?

Capitalised interest is unpaid interest added to the loan balance and repaid at the end, rather than through monthly instalments.

2. Does capitalised interest reduce the amount I get?

Yes. The interest is deducted or deferred, so your net funds received are lower than the loan amount.

3. Is interest-only better than capitalised interest?

Not necessarily. It depends on your cash flow, goals, and repayment strategy.

4. Does capitalised interest affect my borrowing capacity?

It can. Lenders may assess it similarly to interest-only, but they’ll want to see a clear exit strategy.

5. When should I use capitalised interest loans?

They’re ideal for short-term loans where deferring payments helps manage cash flow especially in property or business funding.