Facility limit vs drawn balance: the real cost of private construction finance
Two term sheets. Same headline rate. Same term. One costs roughly 60% more than the other.
The difference is one line: whether interest is charged on the facility limit from day one, or on the drawn balance as funds are progressively released.
Why the difference is so large on construction
A construction facility is drawn down progressively against certified progress. On a typical S-curve, the average drawn balance over the life of the facility is somewhere between 40% and 60% of the limit. So a limit-based charge costs roughly double a usage-based charge over the same term, at the same nominal rate.
A worked comparison on one facility: approximately $600,000 of interest over 14 months on a limit basis, against roughly $375,000 estimated on a usage plus line-fee basis — about a 60% difference on the same money.
That gap is not a pricing detail. On most small-to-mid developments it is larger than the entire establishment fee, the QS budget and the legal costs combined.
Why a lender charges on the limit
It is usually not opportunism. It is a funding-structure consequence.
Where a lender raises its capital from investors upfront — committing the whole facility amount on day one so the money is available when a progress claim certifies — that capital is being paid a return from day one whether or not the borrower has drawn it. The lender passes that through.
A lender funding from a warehouse or a pooled fund can draw as it lends, and can therefore charge on usage, often with a small line fee on the undrawn portion to compensate for the commitment.
Neither model is wrong. But they produce materially different total costs, and the term sheet rarely puts them side by side for you.
Interest reserves make it worse before it gets better
On private facilities the full term’s interest is commonly reserved and deducted upfront from the facility limit, calculated on the modelled term in days.
A worked example: a facility of roughly $550,000 over a 13-month term, with approximately $99,251 of interest reserved, leaving about $430,000 of net cash to the borrower. The developer is paying interest on $550,000 while holding $430,000.
Present this to a client explicitly: the rate, the default step-up, and the full-term interest reserve. Cash in hand is materially less than the facility limit, and a developer who has modelled the limit as available funds will be short at exactly the wrong moment.
One related structural point: where a facility holds a fixed dollar interest reserve rather than an open-ended one, interest accruing beyond that reserve becomes an immediate out-of-pocket obligation. Non-payment is a default event, not an overdraft.
How private construction pricing is actually built
Beyond the headline rate, private and mezzanine construction pricing typically comprises:
- A reference rate plus margin — for example a three-month bank bill rate plus a 13.00% margin, producing something like 16.55%. The reference rate moves; your rate moves with it.
- A separate default rate, commonly the contract rate plus around 4.00%.
- An establishment fee, 1.5–2.5% on senior, higher on mezzanine.
- A line fee on the undrawn portion, where the facility is usage-based. Some lenders quote nil line fee; that is a real saving, not marketing.
- The interest reserve, as above.
The questions to ask before you compare two quotes
- Is interest charged on the limit or the drawn balance? Ask it in exactly those words, in writing.
- If on the drawn balance, is there a line fee on the undrawn portion, and at what rate?
- Is the rate fixed, or a reference rate plus margin? If the latter, which reference rate, and how often does it reset?
- Is the full term’s interest reserved upfront? If so, what is the net cash at settlement?
- Is the interest reserve a fixed dollar amount or open-ended? And what happens when it is exhausted?
- What is the default rate, and what triggers it?
Model it, do not compare rates
Build a simple monthly drawdown schedule from the construction program, apply each lender’s charging basis to it, and add the fee stack. The output is a single dollar number per lender, comparable on its face.
Where a limit-based lender is otherwise the best fit — faster, higher leverage, better on presale conditions — that number tells you exactly what the convenience costs. Sometimes it is worth it. But it should be a decision, not a discovery at the final payout.
One negotiating note: mezzanine and second-mortgage lenders will often not release surplus value or capitalise interest upfront, but can frequently be persuaded to release progressively against the QS’s certified completion percentage — staged, for example, around 50% and 75% completion. That reduces average exposure and therefore total interest on a limit basis too.
General information only. It is not credit assistance, financial product advice, or an offer of finance, and it does not take account of your objectives, financial situation or needs. Figures are de-identified observations over 2024–2026.