What Private Lending Actually Costs in Australia

Key takeaways

• Compare total cost over your real holding period, never the headline rate.
• Establishment fees are commonly quoted in the low single-digit percentages of the loan.
• Fees are usually capitalised into the loan, so you pay interest on them too.
• A short term makes fixed fees expensive in annualised terms - that is the trade for speed.

What does a private lender charge?

A private loan has four cost components: the interest rate, an establishment fee charged upfront, third-party costs for legals and valuation, and sometimes brokerage and an exit or discharge fee. Private lenders are funded by private capital rather than deposits, so they price to deliver their investors a return well above bank rates.

Published market commentary commonly describes establishment fees in the low single-digit percentages of the loan amount, with private mortgage funds targeting investor returns materially above bank lending rates. Those are indicative market ranges, not our rates, and they move with credit conditions.

What actually determines your number is the deal: the LVR, the quality and location of the security, whether it is a first or second mortgage, the term, and how quickly you need to settle. A low-LVR first mortgage over metropolitan property prices very differently from a second mortgage over regional land.

A worked example over nine months

Shape, not a quote. Nothing below is an offer of credit, and every figure is illustrative - your own costs will differ. Assume a $500,000 facility for nine months at an indicative 10% p.a. with a 2% establishment fee, interest capitalised:

The interest is 71% of the cost and the fees are 29%. Shorten the term to three months and the interest falls to about $12,500 while the fees do not move at all - so the fees become the majority of the cost, and the effective annualised rate rises sharply even though the quoted rate has not changed.

That is the single most useful thing to understand about private lending cost: fixed fees punish short terms. It is still often the right trade, because the alternative is losing the transaction entirely.

How to compare two private loan offers

Ask both lenders for one number: the total dollars payable if you repay on your expected date. That collapses rate, fees and capitalisation into something comparable, and it is the only comparison that survives contact with a real deal.

1. Total cost at your expected exit date, not per annum and not at full term.
2. What happens if you are late - the default rate, and whether it applies to the whole balance.
3. Extension terms - what a three-month extension costs, agreed before you need it.
4. Early repayment - whether there is a minimum interest period you pay regardless.

That last one catches people. A loan with a three-month minimum term costs the same whether you repay in three months or three weeks, which can make a cheaper-looking facility the expensive one if your exit lands early.

Frequently asked questions

What interest rate do private lenders charge in Australia?

There is no standard rate. Pricing is set deal by deal from the LVR, the security, the term and the urgency, and sits well above bank rates because private lenders fund from private capital rather than deposits. Ask for the total cost to your expected exit date rather than a rate.

What is an establishment fee?

A fee charged for setting up the facility, usually quoted as a percentage of the loan amount and commonly in the low single digits. It is generally deducted from the advance or capitalised into the loan, so you receive less than the face value or pay interest on the fee.

Are there exit fees on a private loan?

Often, in the form of a discharge fee, and sometimes a minimum interest period that applies even if you repay early. Both should be established in writing before you sign, because they change the cost of an early exit substantially.

Can the fees be paid from the loan instead of upfront?

Usually yes - most private facilities capitalise the fees and the interest. It preserves your cash, but you pay interest on the capitalised amount and you need the higher balance to still fit within the lender's maximum LVR.

Related reading

• Low Doc Business Loans: How They Work and What They Cost
• Business Loan Types: A Complete Australian Guide
• Chattel Mortgage vs Hire Purchase vs Lease: Which and Why

Sources

• Moneysmart - borrowing basics — ASIC
• Credit and loans guidance — ASIC