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Capitalised vs serviced interest

Inputs
Capitalised interest
$44,195.45
No monthly payments. Interest compounds monthly on the growing balance.
Principal$500,000.00
Interest over the term$44,195.45
Loan balance at exit (principal plus interest)$544,195.45
Serviced interest
$42,500.00
Interest paid monthly. The balance stays at the principal until it is repaid at exit.
Monthly interest payment$3,541.67
Interest over the term$42,500.00
Total paid (interest plus principal at exit)$542,500.00
Capitalising adds $1,695.45 of interest over the term compared with servicing, the price of not having to pay monthly. On short-dated bridging where the exit is clear, capitalising is the standard structure. On longer-term files where the cashflow supports it, servicing costs less.
Assumptions
  • The monthly rate is the annual rate divided by 12.
  • Capitalised: interest compounds monthly and nothing is paid until exit.
  • Serviced: interest only on the original principal, paid monthly; the principal is repaid at exit.
  • The rate stays the same for the whole term.

Illustrative estimate only, based on the inputs and assumptions shown. This is not a quote, credit approval or commitment to lend. Actual interest, fees, repayments and terms may differ. Costs not included are listed below.

Costs not included
  • Lender fees, including establishment and any other fees
  • Valuation, legal and settlement costs
  • Government charges and registration fees
  • Default interest, default fees and enforcement costs
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When capitalising makes sense

Capitalising is the standard structure on short-dated private credit, bridging, settlement-funded acquisitions, short-term liquidity against equity. The common characteristic: the borrower is waiting on a specific exit event (a sale, refinance, or business cashflow event) and doesn't want to drain working capital servicing monthly interest during the wait.

The cost is real, capitalising compounds, so the loan balance grows. On a 6-month bridge at 8.5% capitalised, the effective annualised cost is roughly 8.85% (after compounding) versus 8.5% serviced. Most borrowers accept the small premium for the cashflow flexibility.

When servicing is sharper

On 12+ month files where the borrower has the cashflow to service, monthly servicing is the cheaper structure. The loan balance stays flat at the original principal, and the total interest paid is materially lower than the equivalent capitalised loan. Investment files, longer commercial acquisitions, and well-tenanted commercial security typically service.

Hybrid structures

On development files, the structure often switches mid-term, capitalised through the DA-hold phase (when there's no cashflow to service), then converting to serviced once presale revenue or completed asset rental income comes online. The credit team writes the conversion trigger into the loan documents up front so there's no renegotiation when the milestone hits.

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