Quick answer
Capitalised interest means interest is added to the loan balance as it accrues instead of being paid each month, so the borrower makes no repayments during the term and repays the larger balance at exit. The lender sizes the facility to cover the cash advance, costs and an allowance for the term's interest, then checks the property's equity covers the end balance. Where interest is charged on capitalised interest, the balance grows slightly faster each month.
Key points
- The facility limit includes cash, costs and an interest allowance
- The balance rises every month; the payout is highest at the end of the term
- Whether interest is charged on capitalised interest depends on the loan terms
- Equity must cover the end balance, not just the opening advance
- A late exit can exhaust the interest allowance — plan a buffer
Capitalised interest is easy to describe and surprisingly easy to misjudge. “No repayments until the end” sounds simple, but the balance you owe on exit day can be noticeably larger than the cash you received, and the property has to cover that larger figure. The best way to understand it is to follow one loan from settlement to payout.
The concept is covered in our explainer on prepaid or capitalised interest. This guide goes further and puts numbers on every step.
What is capitalised interest, in one paragraph?
On a capitalised loan, interest isn’t paid as it falls due. Instead it’s added to the loan balance — usually monthly — and the borrower repays the whole lot when the loan ends. Interest can be prepaid or capitalised on private secured business loans, so there may be no monthly repayments during the term. It’s arranged per deal and suits loans that will be repaid from a single event, such as a sale, a refinance or a large contract payment.
The scenario: who is borrowing, and why?
Illustrative example: A Canberra commercial cleaning company owns a debt-free warehouse and needs $600,000 in hand to buy out a competitor’s contracts. The exit is a bank refinance once a full year of the combined business’s trading is on the books. It takes a 12-month private first mortgage with interest capitalised. All figures in this guide are round illustrative numbers, not a quote; the actual interest and costs would be set out in the Letter of Offer.
Step 1: How is the facility sized?
The lender doesn’t simply lend $600,000. It sets a facility limit that covers everything the balance will need to absorb over the term:
| Component | Illustrative amount | Why it’s there |
|---|---|---|
| Cash to the borrower | $600,000 | What the business actually needs |
| Assessment fee, legal and settlement costs | $15,000 | Added to the opening balance in this example |
| Interest allowance for 12 months | $75,000 | Headroom for capitalised interest |
| Facility limit | $690,000 | The most the balance can reach |
The opening balance on settlement day is therefore $615,000: the $600,000 paid out plus $15,000 of costs. The $75,000 interest allowance is never paid to anyone; it’s room for the balance to grow.
The lender then checks that the property can carry the facility limit, not just the opening balance. That’s the step people overlook. Our guide to how much equity you can use explains how that test works, and the equity calculator gives a quick first read.
Step 2: How does the balance grow each month?
In this example, the loan agreement charges interest monthly on the full balance, including interest already capitalised. That means each month’s interest is a touch larger than the last.
| Month | Interest added (illustrative) | Balance at month end |
|---|---|---|
| 1 | $5,500 | $620,500 |
| 2 | $5,550 | $626,050 |
| 3 | $5,600 | $631,650 |
| 6 | $5,750 | $648,750 |
| 7 | $5,800 | $654,550 |
| 9 | $5,900 | $666,300 |
| 12 | $6,050 | $684,350 |
Over 12 months, about $69,350 of interest is added. If the same loan charged interest only on the original $615,000 — no interest on interest — the total would be $66,000 and the year-end balance $681,000. The difference, roughly $3,350, is the effect of compounding in this example. Which method applies depends entirely on your loan terms, so read that clause or have your solicitor explain it.
Notice two things. First, the business paid nothing for twelve months. Second, the year-end balance of $684,350 sits just inside the $690,000 facility limit. The interest allowance was sized for a 12-month exit, with very little to spare.
Step 3: What does the payout look like at different exit dates?
The payout figure is the balance on the day the loan is repaid, plus the costs of releasing the security. At settlement of the refinance, funds move electronically and the discharge is lodged with the land registry; PEXA notes settlement itself is typically completed within minutes once all parties are ready.
| Exit | Balance (illustrative) | Plus discharge and settlement costs | Interest-type cost compared with the $600,000 received |
|---|---|---|---|
| Month 7, refinance comes early | $654,550 | About $1,500 | About $39,550 of interest |
| Month 12, on schedule | $684,350 | About $1,500 | About $69,350 of interest |
| Month 13, one month late | About $690,450 | About $1,500 | Facility limit exceeded — needs a decision before it happens |
Discharge costs vary by state. In Western Australia, for instance, Landgate’s schedule from 1 July 2026 lists $225.10 per discharge of mortgage, before legal and settlement costs.
The early exit saves about $29,800 in this example, provided the loan has no minimum interest period that applies. The late exit is the real lesson: one extra month pushes the balance past the limit. That’s not a disaster if it’s raised early, but it’s a conversation you want in month nine, not in month twelve.
Step 4: How should the term and buffer have been set?
Looking back, the company could have protected itself in either of two ways:
- A longer term with a larger interest allowance. Private first mortgages are available for 1 to 24 months. A longer term costs nothing extra if the loan is repaid early (subject to the loan terms) but removes the cliff at month 12. See short-term first mortgages.
- Borrowing slightly less cash. Taking $570,000 rather than $600,000 frees $30,000 of headroom for a few extra months of interest.
Either way, the rule is simple: size the interest allowance for the realistic exit plus a buffer, not the best-case exit. Our guide to exit strategy red flags lists the things most likely to push an exit later than planned.
If your plan relies on a single repayment event and you’d rather not make monthly payments, ask how a capitalised structure would look on your property.
How does capitalised interest compare with paying monthly?
| Monthly interest payments | Capitalised interest | |
|---|---|---|
| Cash out of the business during 12 months | About $66,000 spread across the year | Nil |
| Balance at month 12 | $615,000 | About $684,350 |
| Total interest-type cost (illustrative) | About $66,000 | About $69,350 |
| Risk if trading has a bad month | Missed payment | None during the term |
| Risk if the exit runs late | Lower — balance isn’t growing | Higher — balance approaches the limit |
Monthly payments are a little cheaper in this example but drain cash every month. Capitalised interest costs slightly more but keeps $66,000 working in the business for the year. For a company integrating newly acquired contracts, that cash may be worth much more than $3,350.
Does the maths change on a second mortgage?
The mechanics are identical, but there are now two balances on the title. The lender behind a second mortgage looks at the bank’s first mortgage plus its own growing balance, measured against the property. If the bank loan is being paid down monthly, that helps a little. If the bank loan is interest-only, the combined debt only moves one way during the term.
So in a second mortgage version of our example, the interest allowance has to fit inside whatever equity remains after the bank’s balance — not the property’s whole value. That usually means a smaller cash advance, a shorter term, or both. Second mortgages and caveat loans are typically shorter-term than first mortgages in any case, which also limits how far the combined balance can climb. Our comparison of first mortgages, second mortgages and caveat loans explains how ranking affects what’s possible.
What should you check before choosing capitalised interest?
- How interest is calculated and added — monthly, on the full balance, or otherwise.
- The facility limit and the interest allowance, and how many months the allowance actually covers.
- Early repayment terms, including any minimum interest period.
- The end balance against the property’s equity, with the exit’s own costs deducted.
- Tax treatment. The ATO lists interest on money borrowed to produce assessable income among deductible business expenses; ask your accountant how and when capitalised interest is claimed in your structure.
Our guide to the total cost of a short-term loan shows how to add the fees and exit costs to this picture.
Key terms at a glance
- Capitalised interest: interest added to the loan balance instead of being paid.
- Facility limit: the maximum the loan balance may reach, including capitalised interest.
- Interest allowance: headroom within the facility limit reserved for capitalised interest.
- Payout figure: the balance plus release costs on the day the loan is repaid.
Want to see your own numbers? See if you qualify
Every capitalised loan is built around three numbers: the cash you need, the property’s equity and the date your exit will land. Send us those, along with every debt already secured on the property, and a specialist will show you how the facility could be sized.
Enquiring costs nothing and doesn’t involve a credit check, your details stay with one direct lender rather than travelling to many, and there’s no formal valuation required. Our lending partner fundU sets out the facility limit, costs and interest terms in a Letter of Offer before you commit. Accurate figures up front mean an accurate structure first time. Start your enquiry for a capitalised loan.
Frequently asked questions
Is capitalised interest more expensive than paying monthly?
It can cost a little more where interest is charged on interest already added to the balance. The trade-off is cash flow: nothing leaves your account during the term, so money stays in the business or project until the exit. Your loan agreement sets out exactly how interest is calculated and added.
What is an interest allowance?
It's the part of the facility limit set aside to absorb the interest that will be capitalised over the term. You don't receive it as cash; it's headroom that lets the balance grow without breaching the facility limit.
What happens if I repay before the end of the term?
Generally you repay the balance as it stands on the payout date, plus discharge costs, which is lower than the end-of-term figure. Some loans have a minimum interest period, so check the early repayment terms in your Letter of Offer.
What happens if my exit runs past the term?
The loan falls due at the end of the term regardless. If the exit looks like running late, raise it with the lender early and discuss options such as an extension. Building a buffer into the term at the start is the simplest protection.
Can a second mortgage have capitalised interest?
Yes, interest can be prepaid or capitalised on second mortgages and caveat loans as well, arranged per deal. The lender looks at the total of the first mortgage plus the growing second mortgage balance against the property.