1. The cost of the underlying capital
A bank funds a mortgage largely from customer deposits, which cost it very little. A private credit transaction is funded by wholesale investors who could otherwise buy a term deposit, a bond or a listed security — so they require a return that compensates them for taking property-secured credit risk and giving up liquidity for the term.
Whatever the investor is paid, plus the cost of arranging, administering and managing the loan, sets the floor under the borrower's rate. Private lending cannot be cheaper than the return its investors demand.
2. The risk the lender accepts
Private lenders regularly take positions banks decline: no tax returns, recent arrears, an ATO debt, a partially built project, a company that has been trading for eight months, or a loan that is entirely dependent on a single sale settling. Some of those loans will default and take time and cost to recover.
The rate across the whole book has to absorb that reality. Higher-risk structures — second mortgages, caveats, mezzanine — sit behind other debt and are priced sharply higher because if things go wrong, they get paid last.
3. Speed and certainty are worth paying for
Delivering indicative terms in a day and settlement in a week takes senior credit people, valuers and lawyers working to compressed timeframes. That resourcing costs money, and it is the actual product being bought.
For most commercial borrowers the honest comparison is not 'private rate versus bank rate'. It is the cost of the private facility for a few months against the cost of losing a site, breaching a contract, missing a purchase, or holding an unsold project for another year.
4. Short terms make headline rates look worse
Private facilities are usually quoted as an annual rate but held for three to twelve months. A twelve-month annual rate held for four months costs roughly a third of the headline number in actual interest, though establishment fees are largely fixed regardless of how long you hold the loan.
That is why the total cost of funds over the term — interest plus fees, measured against the outcome the loan makes possible — is a far better test than comparing headline rates side by side.
What actually moves your rate
Pricing improves with a lower LVR, a first-ranking mortgage, metropolitan security that is easy to sell, a clean and evidenced exit, an experienced sponsor with a track record, and a shorter term. It worsens with high combined LVR, subordinated security, specialised or rural assets, construction risk and vague exits.
Key points
- Investor-funded capital costs more than bank deposits.
- Rates absorb losses on the harder loans private lenders accept.
- Speed, flexibility and certainty of execution are part of the price.
- Judge total cost over the real term, not the headline annual rate.
Frequently asked questions
What do private lending rates run at in Australia?
Pricing varies widely with security position, LVR, term and market conditions. First mortgages price sharpest, with second mortgages, caveats and mezzanine materially higher. We provide indicative pricing on a specific transaction rather than a published rate.
Will the rate come down if I improve the deal?
Often, yes. Reducing LVR, adding security, moving to a first-ranking position, evidencing the exit or shortening the term all improve pricing.
Are there fees on top of interest?
Yes — typically an establishment fee, plus valuation, legal and search costs, and sometimes a line or exit fee. Always compare the total cost of funds, not just the rate.