Capitalised interest

Most loans ask for interest every month. Capitalised interest takes a different approach: the interest is added to what you owe, and the whole amount is repaid when the loan ends. For a business whose money arrives as a lump sum, from a sale, a refinance or a big contract payment, that can be the difference between a loan that helps and one that drains cash flow.

How does capitalised interest work, month by month?

1. Settlement. You receive the advance, less fees and costs. Nothing is held back for interest.
2. Each interest period. Interest is calculated on the balance and added to it instead of being debited from your account.
3. If the contract provides for it, interest is charged on interest. ASIC’s Moneysmart defines compound interest as interest on the initial principal plus accumulated interest. Over a short term the effect is modest; over a longer one it adds up.
4. The exit. You repay the original advance, all capitalised interest and any costs in a single payout.

What changes across the term?

Point in the loan	Balance owing	Equity buffer	What to watch
Settlement	The advance	At its widest	Make sure the facility allows for the full term’s interest
Midway	Advance plus interest so far	Narrower	Is the exit still on track?
Maturity	Advance plus all capitalised interest	At its narrowest	Request a dated payout figure early
After maturity, if unpaid	Still growing, possibly with default charges	Shrinking faster	Agree an extension before the due date

It helps to ask the lender, before you accept the offer, for an indicative payout figure at maturity. Seeing that single number in writing makes the cost concrete and lets you check it against the net proceeds your exit will produce.

That last row is why a capitalised loan needs a realistic exit date. The loan-to-value ratio rises steadily, and a lender tests the loan on its end-of-term figure.

Why does capitalised interest matter to a borrower?

The upside is clear: every dollar of the advance goes to work, and the business isn’t tied to a monthly payment that its cash flow can’t comfortably meet. There’s also no monthly payment to miss, which removes one common route into default.

The cost is less visible. The payout figure is larger than the advance, and the equity left at the end is smaller. Three habits keep it under control:

• Know the exact payout clause. Find out how interest is calculated on the growing balance and when it is added.
• Pick a term that fits the exit, with a buffer, but not wildly longer than you need.
• Repay early if the money arrives early. Interest stops building on whatever you repay.
• Talk tax with your accountant. The ATO lists interest on money borrowed for producing assessable income among deductible operating expenses; timing and treatment of capitalised amounts is a question for your adviser. Our guide on whether business loan interest is tax deductible sets out the basics.

Illustrative example: a Hobart boat-builder needs $250k for nine months to fund materials and wages on a large commission, secured on his workshop. The final payment from the client is due in month eight. With interest capitalised, he receives the full $250k less costs and makes no interest payments. Assume, for illustration only, that interest across the term adds about $25k. The lender checks that the workshop’s equity covers roughly $275k plus costs at maturity, and the client’s final payment clears the loan in month eight, a month early, so interest stops building at that point.

How is capitalised interest different from prepaid interest?

Both remove monthly payments. Prepaid interest sets the interest aside at settlement, so you receive less cash up front but owe a fixed amount at the end. Capitalised interest gives you more cash up front but a payout that grows. The prepaid or capitalised interest page compares the two in detail, and the worked example guide walks through a balance month by month.

Which related terms should I know?

• Exit strategy: the event that repays the capitalised balance.
• Discharge of mortgage: how the payout figure becomes a clear title.

More definitions sit in the glossary. If you’d like to see whether a no-repayment structure suits your deal, start a quick enquiry.

Would no monthly repayments help your business?

Tell us about the property, what’s owing on it, how much you need and when the money to repay it will arrive. There’s no credit check to enquire, your details stay with one direct lender, and a real specialist reviews every enquiry. Accurate dates for your exit let us size a capitalised loan that still leaves you comfortable equity at the end. See if you qualify.