The true cost of bridging finance: effective rate, prepaid interest and disbursements
Short-term facilities are quoted as a rate. They are not paid as a rate. Between the headline number and the money that actually leaves your account sit an establishment fee, a minimum interest period, prepaid interest deducted at settlement, legals, registration costs and an exit. Compare two quotes on rate alone and you will regularly pick the more expensive one.
The arithmetic
A private construction quote at 13.95% p.a. with a 2.5% establishment fee over a 12-month term costs roughly 16.45% in year one once the establishment fee is amortised across the term.
That is the easy case, because the term matches the fee period. The fee does not amortise — it is paid once, in full, at settlement. So the shorter your actual hold, the worse the effective rate gets:
- 2.5% establishment over 12 months adds ~2.5 percentage points.
- The same fee over 6 months adds ~5 percentage points.
- Over 3 months, ~10 percentage points.
A three-month bridge at “11.99% with a 2.2% establishment fee” is not an 11.99% facility. It is closer to 20% annualised on the money you actually used.
The five components to price
1. Interest rate and how it is charged
Charged on the drawn balance or on the facility limit? On a staged or construction-style facility that difference is large and it compounds. Ask explicitly.
2. The minimum term, which is the real term
Private lenders will not insert a binding clause preventing early repayment — it is unenforceable. The commercial equivalent is a minimum term with that period’s interest prepaid at settlement. If your facility has a six-month maximum and a four-month minimum, and your exit lands at month three, you paid for four.
This is negotiable. Minimum terms have been moved from six months to three, and prepaid interest reduced from six months’ worth to three, simply by asking. Negotiate the minimum term, not just the rate — especially where the exit is a sale that could settle early.
Two structures to distinguish:
- Retained interest for the full term, refunded on early discharge. More expensive at settlement, but the unused portion comes back and there is no cash-flow cliff.
- Short minimum term, then monthly interest in advance. Cheaper upfront, but once the minimum lapses the borrower has to start servicing monthly — which is often the worst possible timing on a project that has run long.
Match the retained-interest period to the expected project timeline, not to the contractual minimum. A minimum that is too short is not a saving.
3. Establishment, broker and legal fees
Establishment fees on private facilities commonly run 1.5–2.5%, higher on second mortgages. Legals of $5,000–$6,600 are typical; on larger or multi-security deals, more. Broker fees are separate and disclosed.
Watch one dynamic: some private second-mortgage lenders push back where the broker fee exceeds their own establishment fee. That is a negotiation to have before documents are drawn, not after.
4. Disbursements at settlement
Net funds are what matters, and the schedule is itemised. Two worked examples:
- A $450,000 advance netting roughly $352,600 after a $69,612 prior-mortgage payout plus standard fees.
- A $740,000 advance with 12 months’ prepaid interest deducted upfront ($74,000), establishment and procuration at ~2.2%, broker fee, legals and search/PEXA fees — netting $640,752.
On the second, the borrower received 87% of the facility. That is not a criticism of the structure; it is the structure. But walk the client through the disbursement schedule before settlement so the net figure is not a surprise on the day.
5. The exit
Discharge is not free and it is not a round number. A private lender builds a payout figure as: full-term interest charged, less interest already paid in advance, plus itemised legal costs and disbursements for issuing the discharge.
A worked example: principal $450,000, interest at 20% charged $45,000, less $22,500 already paid in advance, plus legal costs of seven items at $660 + GST each ($5,082) and disbursements of $1,792.53 — a total payout of $479,374.53. Budget the legal line items separately; they are itemised, not folded into a round number.
One timing trap: where a discharge figure includes a refund of unused prepaid interest, that refund typically only holds if settlement happens by a specific date. Lock it in inside the stated window.
Why the cheaper headline rate often loses
A worked comparison on a $1.2m unencumbered commercial security at 60–70% LVR, needed for a genuine three-to-six month bridge:
- Private lender: 11.99% p.a., 2.20% establishment, true six-month facility term with a three-to-four-month minimum, 2-day approval, 7-day settlement, $6,000 legals.
- Bank-style commercial lender: 8.69% p.a., 1.00% establishment, but a five-year facility term (the maximum interest-only term, even though only months were needed), 0.60% introducer fee, 5-day approval, 15-day settlement, $1,000 legals.
The second is materially cheaper on rate and fees. It is also wrapped in a five-year facility the borrower does not want, approves more slowly, and settles eight days later. If the exit is a sale in four months, the first option’s minimum-term structure matches the actual need and the second creates a break problem.
Neither is right in the abstract. The point is that the comparison is all-up dollar cost over the actual holding period, plus whether the facility’s shape matches the exit — not the rate.
Two more levers
Under-quote the term where a penalty-free rollover exists. If a lender offers, say, an eight-week penalty-free rollover beyond expiry, taking a five-to-six month fixed term instead of seven-to-eight shrinks the window in which a break penalty could bite, while the rollover absorbs slippage.
Check the LVR basis before you quote. A deal presented at 78.36% LVR on an inc-GST security value was recalculated by the lender at 83.7% on the ex-GST value — $4,285,000 against $4,575,000 — and declined. Confirm inc-GST or ex-GST before you put a headline LVR in front of anyone.
The comparison worth running
For each quote, calculate: total interest over your expected hold (not the maximum term), plus establishment, plus broker fee, plus legals, plus registration and search costs, plus the discharge estimate, plus any minimum-term interest you will pay but not use. Divide by net funds received. Annualise.
That number is comparable across lenders. The headline rate is not.
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. Rates, fees and structures described are indicative observations over 2024–2026 and change without notice.