Quick answer
On many property-secured business loans, interest can be prepaid at settlement or capitalised, meaning added to the loan balance as it accrues, instead of paid monthly. Prepaying reduces the cash you receive but keeps the end balance lower. Capitalising keeps cash flow and the full advance free but increases the balance repaid at the end. Both suit businesses that need breathing room.
Key points
- Prepaid: interest deducted at settlement, no monthly payments
- Capitalised: interest added to the balance, no monthly payments
- Monthly: pay as you go, lowest end balance
- Choose based on cash flow and the repayment plan
Why repayment structure matters
When a business borrows because cash flow is tight, adding a monthly loan repayment can make the very problem it is trying to solve worse. That is why many property-secured business loans offer alternatives to monthly repayments. On our property-secured loans, you can prepay interest or add it to the balance, so the business can use the funds without an immediate repayment burden.
Prepaid interest
With prepaid interest, interest for some or all of the term is calculated upfront and deducted from the loan at settlement. You receive less cash, but there is nothing to pay during the prepaid period, and the balance at the end is the amount originally borrowed. Prepaying suits borrowers who want certainty and a lower end balance.
Capitalised interest
With capitalised interest, interest is added to the loan balance as it accrues. You receive the full advance and pay nothing during the term, but the balance grows. At the end, you repay the original amount plus the accumulated interest. Capitalising suits borrowers who need every dollar of the advance working in the business now.
Monthly interest
Paying interest monthly keeps the balance close to the original loan but requires cash flow to meet each payment. It suits businesses whose cash flow is healthy and who prefer to keep the end balance as low as possible.
Comparing the three
The trade-off is between cash today and balance tomorrow. Prepaid reduces cash today but protects the end balance. Capitalised keeps cash today but raises the end balance. Monthly costs cash every month but keeps the balance steady. To compare, calculate the total cost and the amount owing at the end under each, using figures from your quote.
Effect on LVR and the exit
Because capitalised interest increases the balance, lenders consider the projected end balance when assessing LVR. Your repayment plan, whether trading income, a refinance or a sale, must cover the full end balance. See loan-to-value ratio explained and our guide on exit strategies.
Flexibility if plans change
Property-secured terms are flexible; you can keep the loan as long as you need it, for example while a delayed refinance is finalised. Ask how interest will be treated if the term is extended, and whether you can switch structures part-way through.
An illustrative example
A tourism operator borrowed against her home to refurbish cabins over winter. Choosing capitalised interest meant no repayments during the quiet months; the loan was repaid from summer takings plus a bank refinance. A builder borrowing for a director penalty notice chose prepaid interest for three months, knowing a progress payment would repay the original amount.
Questions to ask about interest structure
How is interest calculated and how often is it added? What is the projected balance at the end of the term? If I repay early, is any prepaid interest refunded or adjusted? What happens to the interest structure if the term is extended? Is there a cost to switch from capitalised to monthly payments if my cash flow improves? Written answers let you compare structures properly and avoid surprises at the end of the loan.
Matching the structure to the exit
If the loan will be repaid from a lump sum such as a refinance, a sale or a contract payment, capitalised or prepaid interest often fits well, because the whole balance is cleared in one payment. If the loan will be repaid gradually from trading income, monthly payments may suit better, because they stop the balance growing while trading catches up.
Choose the structure that fits
Enquire in a minute and tell us about your cash flow and repayment plan. Enquiries carry no credit check, a human reviews it, and one team handles it. Find the right structure.
Frequently asked questions
What does capitalised interest mean?
Interest is added to the loan balance as it accrues rather than paid each month. The balance grows and is repaid at the end.
Does prepaying interest save money?
It changes timing and the cash you receive rather than necessarily the total. Compare total cost under each option.
Why choose no monthly payments?
To keep cash flow free while the business recovers, completes a project or waits for a refinance or sale.
Does capitalised interest affect how much I can borrow?
Yes. Lenders consider the projected balance at the end of the term against the property value.
Can I switch structures during the loan?
Sometimes, by agreement. Ask before signing.
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