Quick answer
Default interest is an additional interest charge, set out in the loan contract, that applies on top of the ordinary interest while a loan is in default. On a short-term private mortgage the most common trigger is not repaying in full by the maturity date; missed payments and breaches of loan terms can also trigger it. It usually runs from the day of default until the default is fixed or the loan is repaid.
Key points
- It's a contractual charge, so the Letter of Offer and loan agreement tell you exactly how it works
- Missing the maturity date is the most common trigger on short-term secured loans
- It's usually charged on the whole outstanding balance and accrues daily
- An extension agreed before maturity, or an early refinance, is how most borrowers avoid it
- Set by
- Your loan contract
- Main trigger
- Loan not repaid at maturity
- Avoided by
- Acting before the due date
Every secured loan contract has a section on what happens when things go wrong. Default interest is usually the first consequence you feel, well before any talk of enforcement. Understanding it is mostly about understanding timing.
How does default interest work on a private secured loan?
Private secured business loans are short. Most are repaid in one payment at the end, from a sale, a refinance or a contract payment. That makes the maturity date the single most important date in the contract, and the most common point at which default interest begins.
In broad terms:
- The contract defines default. Typical events include not repaying by maturity, missing a scheduled payment, letting insurance lapse, granting other security without consent, or an insolvency event.
- A higher charge applies while the default continues. It sits on top of, or replaces, the ordinary interest charge. The Letter of Offer and loan agreement spell out exactly how it’s worked out.
- It usually applies to the whole balance. Including interest already capitalised, and it generally accrues daily.
- It stops when the default is cured. That might be the day the loan is repaid, or the day an agreed extension takes effect.
We don’t publish pricing of any kind, default or otherwise, because every loan is priced on its own security, term and exit. What you’ll always get is the full method in writing before you commit.
What usually triggers it, and how can I avoid each trigger?
| Trigger | What typically happens | How to avoid it |
|---|---|---|
| Loan not repaid at maturity | Default interest from the day after maturity | Ask for an extension or start a refinance well before the due date |
| Missed scheduled payment | Default on that payment, sometimes on the whole loan | Choose prepaid or capitalised interest if cash flow is lumpy |
| Insurance lapses | A breach of the loan terms | Diarise renewals and send the lender each certificate |
| Further security granted without consent | A breach that can make the whole loan due | Ask the lender first, in writing |
| Exit delayed but still alive | Default charges build while you wait | Tell the lender early and show evidence the exit is coming |
The second row is one reason prepaid interest and capitalised interest suit many short-term borrowers: with no monthly payments, there’s no monthly payment to miss.
Why does default interest matter to a borrower?
Because it compounds a problem that’s usually already stressful. A sale that settles six weeks late can cost far more than the six weeks of ordinary interest, and if default charges are capitalised they eat into the equity that would otherwise fund a refinance.
It’s also the opening step in a longer process. In Victoria, for example, the Transfer of Land Act lets a lender serve a default notice once a default has continued for one month or the period fixed in the mortgage. From there, the path can lead to a mortgagee in possession.
On fairness: the unfair contract terms law covers standard form small business contracts, and ASIC enforces it for loans. ASIC gives an example of a default fee that is likely to be unfair because it costs the business more than is needed to protect the lender from loss. The ACCC notes that since 9 November 2023 penalties apply to businesses that propose, use or rely on unfair terms.
Illustrative example: an Adelaide builder takes a $300k six-month caveat loan, planning to repay it from the sale of a completed townhouse. The buyer’s finance is delayed and settlement looks like landing five weeks after maturity. Option one: say nothing and pay default interest on the full balance for those five weeks. Option two: a month before maturity, send the lender the signed sale contract and the buyer’s revised settlement date and ask for a short written extension. The second path usually costs less, and keeps the relationship intact for the next deal.
Which related terms should I know?
- Exit strategy: the plan that keeps you out of default in the first place.
- Loan term extensions: how to ask, and what lenders look for.
- Letter of offer: where the default terms are first set out.
- Pay out an expiring private loan: refinancing a loan that’s about to mature.
Every other term is in the glossary. If a maturity date is approaching and the exit isn’t ready, talk to a specialist now.
Is your maturity date getting close?
Refinancing before the due date is almost always cheaper than after it. Tell us about the property, the current lender, the payout amount and when it falls due. There’s no credit check to enquire, your information goes to one direct lender rather than a broadcast list, and a real specialist reviews it. Give us accurate figures on what’s owing and the exit you’re working towards, and we can tell you quickly whether a new loan can step in. See if you qualify.
Frequently asked questions
When does default interest start?
Whenever the contract says a default has occurred. For short-term private loans that is most often the day after the maturity date if the loan hasn't been repaid, or the day a scheduled payment is missed. Some contracts allow a short grace period; your loan agreement will say.
Is default interest charged on the whole loan or just the overdue amount?
It depends on the wording, so read it before you sign. Many contracts apply it to the entire outstanding balance, including any capitalised interest, which is why even a short delay can be costly.
Can default interest be added to the loan balance?
Yes, many contracts capitalise it along with ordinary interest, so it shows up in the payout figure rather than as a bill. That makes the equity buffer shrink faster, which matters if the delay drags on.
Is a high default charge always enforceable against a small business?
Not always. Standard form small business contracts, including loans, are covered by unfair contract terms laws, and ASIC's guidance says a default fee is likely to be unfair if it costs the business more than is needed to protect the lender from loss. Have your solicitor review any default clause that looks out of proportion.
How do I stop default interest once it has started?
By curing the default: bringing payments up to date, agreeing an extension in writing or repaying the loan through a refinance or sale. Ask the lender to confirm in writing the date ordinary terms resume.