_edited.png){kind=small}
Capitalised Interest Explained: How It Works in Australian Private Lending
Updated: 49 minutes ago
Capitalised interest is interest added to the loan balance and repaid later, usually when you sell the property or refinance. It can reduce the cash you need to pay during the loan term while increasing the final payout. The loan agreement sets when interest is added and whether future interest is charged on that higher balance.
Borrowers comparing a business bridging loan or a business-purpose second mortgage should ask for three figures in writing. Check the cash you receive at settlement, the highest balance expected during the term and the amount you would owe at your planned exit date.
What Is Capitalised Interest?
Interest accrues at the contracted rate. When the lender adds it to the balance, it becomes part of what you owe. If the lender then calculates interest on that higher balance, the interest compounds. Daily accrual and the date interest is added can be different.
An interest reserve is an amount allowed for in the facility to cover interest. Interest can also be retained at settlement, which reduces the cash paid out upfront. Ask the lender to show whether interest will be retained, added as it accrues or paid during the term.
A higher balance leaves less headroom against the property's value. Allow for fees, existing mortgages and the effect of an exit that takes longer than planned.
How Capitalised Interest Works in Australia: Step by Step
The interest schedule in your loan offer should show how the balance changes from settlement to repayment.
Confirm the initial advance, the fees and any retained interest in the settlement statement.
Interest accrues on the balance and at the rate specified in the loan agreement.
Interest is added to the loan on the agreed schedule. If the agreement compounds interest, future interest is calculated on the higher balance.
Allow for interest and fees when estimating peak debt and the equity available at your exit.
On repayment, the lender issues a payout figure showing the balance, interest and any applicable fees or discharge costs.
When Capitalised Interest Suits You
Capitalised interest may suit a short funding gap if the expected sale or refinance can repay the growing balance. Compare the upfront cash available and the final cost against an interest-only structure.
A business is bridging a commercial property purchase until another property sale settles.
A business owner is raising working capital behind an existing mortgage and has a supported refinance exit.
A borrower uses property equity for a business purpose and needs to preserve operating cash until the planned exit.
How capitalised interest affects cost and LVR
Ask whether the lender assesses loan-to-value ratio (LVR) using the initial balance, the full facility limit or projected peak debt. If there is an existing first mortgage, ask how its balance is included in the combined LVR.
Net proceeds are the cash available after deductions at settlement. An existing debt payout, fees or retained interest can reduce this figure.
Peak debt is the highest projected balance, including any interest and fees added to the loan.
The payout amount is what you owe on the actual exit date. Ask for figures at your expected exit date and at the end of the loan term.
When comparing first mortgage funding with other options, ask for the interest, fees and total payout at the same exit date. The timing of charges can affect the total cost.
Worked examples of capitalised interest
Hypothetical example with monthly compounding
On $100,000 at an illustrative 1% per month for six months, interest added and compounded monthly gives a payout of $106,152.02 before fees. At the same rate with monthly interest-only payments, you would pay $6,000 in interest over six months and repay $100,000 at exit. Monthly compounding adds $152.02 in this example. The example assumes no further draws or payments on the capitalised loan and uses an illustrative rate.
Hypothetical example with interest retained at settlement
If the loan limit is $100,000 and the lender retains $6,000 for interest at settlement, the cash advanced is $94,000 before other deductions. Ask how any unused retained interest is treated if you repay early.
Hypothetical example of combined LVR
If a property is valued at $800,000 and the first mortgage balance is $400,000, a projected second mortgage balance of $160,000 gives a combined LVR of 70%. Use the lender's assessment basis when checking eligibility.
Capitalised vs Interest-Only vs Pre-Paid Interest
Ask the lender to show the cash available on day one and the total amount due at your planned exit for each option.
With capitalised interest, deferred interest is added to the balance and repaid later. Other payments or fees can still apply under the loan agreement.
With interest-only servicing, interest is paid as it falls due. The principal remains payable at exit unless it is repaid during the term.
With retained interest, the lender deducts an interest amount from the settlement proceeds. Check the treatment of unused interest on early payout.
How to Apply for a Capitalised Interest Loan
For a business-purpose enquiry, start with the property, the use of funds and how you plan to repay. The lender will specify what it needs to verify the scenario.
Business purpose and the net amount required.
Security address, estimated value and existing debt.
The required term, settlement deadline and evidence of your sale or refinance exit.
Frequently Asked Questions
Does capitalised interest cost more than interest-only?
It can. If the same rate is charged on the rising balance, compounding increases the interest cost. Compare the proposed rates, fees and payout figures using the same amount and term.
Does capitalised interest reduce the cash I receive at settlement?
It depends on the loan structure. Interest retained upfront reduces the cash received at settlement. Interest added after settlement increases the balance as it accrues. A lender may also allow for interest inside the total facility limit.
How does capitalised interest affect my LVR?
When a lender uses projected peak debt or the total facility limit in its loan-to-value calculation, the allowance for interest can increase LVR and reduce the available net advance. With a second mortgage, the first mortgage also contributes to combined LVR.
Can I switch from capitalised interest to interest-only during the loan?
Ask the lender whether the agreement allows a switch. Any change depends on lender approval and the loan terms. Check the interest and repayment dates before agreeing to a change.
Is capitalised interest common in private lending?
It is used on some short-term property-backed facilities, including bridging and second mortgages. Availability depends on the lender, the security and the evidence supporting repayment.
Is capitalised interest tax-deductible?
It depends on how the borrowed funds were used and the circumstances of the loan. Ask a registered tax agent about the treatment of the interest, including any interest charged on previously capitalised interest.
What happens at loan exit if the security sale is delayed?
Contact the lender as soon as a delay becomes likely. An extension depends on the loan terms and lender approval. Ask for the revised payout and any additional interest, fees or default charges that could apply.
What to ask before signing
Ask for a settlement statement and payout estimates for the planned exit and a later exit. Check that the expected sale or refinance can cover the full balance and any costs.
If you are comparing structures for a property-backed business loan, send us your scenario with the amount you need, the property and debt details, and your repayment plan.
