Private lending: when it makes sense

A private lender is a non-bank funder lending its own money or money raised from investors. The capital comes from high net worth individuals, family offices, or a managed fund set up for the purpose. They are not deposit-taking institutions, they are not subject to the same prudential rules as banks, and they set their own credit policy.

That independence is the whole product. A private lender can consider a deal a bank cannot, decide in days rather than weeks, and take a view on security and exit rather than on three years of tidy financial statements. It is also why the money costs more. You are paying for certainty and speed, and both are genuinely valuable when there is a date on the calendar you cannot move.

Most private lending in Australia is business-purpose lending secured by real property, either as a first mortgage or behind an existing first. Terms are short. Three to twenty-four months is typical, and anything described as long-term private money should be examined carefully.

The speed is not marketing. It comes from three structural differences in how the loan is assessed.

• The decision is security-led. The central question is what the property is worth and how much of it the lender is being asked to advance against, rather than whether a servicing calculator says the repayments fit.
• Interest is commonly prepaid or capitalised into the facility, so there are no monthly repayments to demonstrate. That removes serviceability from the critical path entirely.
• The credit decision is usually made by a person or a small committee with direct authority, not escalated through a queue.

What remains on the critical path is valuation and legal work. A private loan can be approved in a day and still take two or three weeks to settle if a full valuation is needed, the title has complications, or a caveat and a second mortgage have to be negotiated with an existing first mortgagee. When a lender quotes a settlement timeframe, ask which of those steps is already assumed to be complete.

We do not quote rates and we will not imply one is available. What we can do is set out every component so nothing on the letter of offer surprises you. Price the whole package in dollars over the expected term, not on any single percentage.

• Interest, often prepaid for a set number of months or capitalised into the loan amount
• An establishment or line fee, deducted at settlement rather than paid separately
• Lender legal costs, payable whether or not the loan proceeds past documentation
• A valuation fee, and a second valuation if the first is challenged or expires
• Broker fee, which must be disclosed to you before you commit
• Discharge or exit fees, and the cost of removing any caveat or second mortgage
• Extension fees, which apply if you need more time at the end of the term
• A default rate, which typically applies to the entire balance rather than the arrears, from the day of default

Net advance

What actually reaches your account at settlement, after prepaid interest, establishment fees and legal costs come out of the face amount.

Prepaid interest

Interest taken upfront for a set number of months. There is no monthly repayment to make, which is why serviceability drops off the critical path.

Capitalised interest

Interest added to the balance as it accrues rather than paid across. Convenient in the moment, and it consumes equity quietly across the term.

Loan to value ratio

The loan measured against the lender's valuation of the security. On a private facility it should be measured including capitalised interest and fees, not just the advance.

Default rate

The higher rate that applies once the loan is in default. On private facilities it commonly applies to the whole balance from the day of default, not only to the arrears.

Discharge

The release of the lender's security once the loan is repaid, together with the payout figure that has to be produced before your next lender can register.

• Funding trading losses. Short expensive money makes a loss-making month into a loss-making year with a deadline attached.
• No identifiable exit. If the plan is that things will improve, this is the wrong product and the wrong time.
• A bank would say yes in four weeks and you have six. Pay the cheaper price and wait.
• The equity is too thin. If the loan plus costs plus capitalised interest crowds the available equity, there is no margin for a slow sale.
• Owner-occupied home, personal purpose. That is regulated consumer credit and most private lenders will not, and often cannot, write it.

This is the part most articles skip, and it changes your legal position materially. Credit provided wholly or predominantly for business or investment purposes generally sits outside the National Consumer Credit Protection Act. Credit for personal, domestic or household purposes, including most lending secured by an owner-occupied home, sits inside it.

Inside the Act, you get responsible lending obligations, prescribed disclosure, hardship provisions and access to external dispute resolution against a licensed lender. Outside it, you generally do not. Many private lenders are not credit licensees and are not members of an external dispute resolution scheme, so if something goes wrong your remedies are whatever the loan contract and general law provide.

WeL’nd operates as a credit representative and offers external dispute resolution through AFCA in relation to our own conduct as a broker. That is separate from whether a particular lender is licensed or scheme-member, which is a question we will answer for you in writing before you proceed.