Capitalised vs serviced interest
Side-by-side comparison of the two interest-payment structures most common in Australian private credit. Useful for sizing the trade-off between cashflow burden and total cost.
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 and longer-term construction files, the structure often switches mid-term, capitalised through the construction or 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.