Short-term property finance explained

For the bigger picture, start with our overview of private lending in Australia.

What short-term property finance is

Short-term property finance is a loan secured by land or buildings that is designed to be repaid within a short period, typically months rather than the decades of a standard home loan. The phrase is an umbrella. It covers several products that Privet explains separately, including private first mortgage loans, second mortgage loans, caveat loans, bridging finance and some commercial property loans. What they share is a short horizon, a heavy reliance on the property as security, and a clear plan for how the debt will be repaid.

People sometimes use other names for the same idea: short-term commercial finance, short-term property loans, private property loans or simply "private lending". The words matter less than the structure. Before you compare offers, it helps to understand what all short-term lenders tend to look at, how they price risk, and where borrowers most often get into trouble.

Privet is not a lender, broker or adviser. This page is general information to help you ask better questions. It does not consider your circumstances, and it is not a recommendation to borrow.

How short-term property finance works

A short-term loan usually follows the same broad path, whichever lender provides it.

1. Enquiry and indicative terms. You describe the property, the amount, the purpose and the exit. The lender or broker may provide indicative terms, often in a short document. Indicative terms are not an approval and can change.
2. Valuation and due diligence. The lender orders a valuation, searches the title, checks existing debts and reviews the evidence for your exit. It may ask for identification, company documents and a statement of position for any existing loan.
3. Formal offer and loan documents. If the lender is satisfied, it issues a formal offer and loan documents. These usually include a loan agreement, a mortgage or charge, and often personal guarantees from directors.
4. Settlement. The lender registers its security (or lodges a caveat), pays out any loan being refinanced, deducts fees and any prepaid interest, and releases the balance.
5. The term. Interest is paid monthly, prepaid at the start, or added to the balance (capitalised), depending on the structure.
6. Exit. The loan is repaid from a sale, a refinance or another cash event. The lender discharges its security.

Because the lender is not relying on decades of income, the assessment usually places more weight on two things: the value and saleability of the security property, and the strength of the exit. Income and credit history still matter, particularly where interest is paid monthly, but they are rarely the whole story. For a deeper walk-through of each stage, see how private lending works.

Loan-to-value ratio

Lenders limit how much they will advance relative to the value of the security, expressed as a loan-to-value ratio or LVR. Short-term lenders often keep LVRs conservative because they need a buffer if the property has to be sold in a hurry. The acceptable LVR depends on the lender, the type of property, its location and whether the loan ranks first or second. Use the LVR and loan-to-cost calculator to see how your numbers look, and remember that the lender's own valuation decides the figure, not your estimate.

Interest structures

Short-term loans commonly use one of three interest structures, explained in detail in interest structures and fees:

• Monthly interest (serviced). You pay interest each month from your own funds. This keeps the balance level but needs reliable cash flow.
• Prepaid interest. Interest for some or all of the term is deducted at settlement and held by the lender. You receive less cash up front, but there are no monthly payments during that period.
• Capitalised interest. Interest is added to the balance as it accrues. There are no monthly payments, but the debt grows and the exit must cover the larger amount.

Prepaid and capitalised structures are popular because the borrower often has no regular income from the property during the term. Both make the exit even more important, because the whole cost is repaid at the end. Ask whether any unused prepaid interest is refunded if you repay early.

Typical costs and fees

Privet does not publish rates or fees as offers, because pricing varies between lenders and over time and depends on the specific deal. Instead, here are the cost items you should expect to see and ask about. A good offer document lists every one of them.

• Interest rate. Usually higher than a standard bank loan. Check whether it is quoted monthly or annually, and whether a lower rate applies only if payments are on time.
• Establishment or application fee. Commonly charged as a percentage of the loan, often deducted at settlement.
• Broker fee. If a broker is involved, ask how much they are paid, by whom, and whether that amount is added to your loan. Read how brokers and professionals are paid.
• Valuation fee. Usually paid by the borrower and often non-refundable even if the loan does not proceed.
• Legal fees. You normally pay the lender's legal costs as well as your own lawyer's.
• Line, administration or exit fees. Some lenders charge ongoing or exit fees. Make sure you know about them before you sign.
• Default interest and extension fees. A higher rate or a fee can apply if you are late or need more time. These often matter more than the headline rate.
• Discharge and registration costs. Government fees to register and later discharge the mortgage, which vary by state.

The loan cost estimator turns these items into a total cost over your expected term, so you can compare offers on the same basis. Run it twice: once for the term you expect, and once with a delay of a few months, to see how much a slow exit would cost.

Exit strategies

The exit is the single most important part of a short-term loan. Common exits include:

• Sale of the security property or another property, for example after a renovation, subdivision or completion of a development.
• Refinance to a bank or non-bank lender once a condition has been met, such as the property being leased, a business producing trading history, or construction being complete.
• A known business or legal payment, such as a settlement payment, tax refund or contract payment.

Lenders want evidence. For a sale, that might be a signed contract, a sales campaign plan or comparable sales. For a refinance, it might be a letter from the intended lender setting out what it needs. Evidence does not remove the risk, but it makes the plan credible.

Always plan a backup exit. Sales fall over, valuations come in lower than expected, and refinance lenders change their policies. Ask what an extension would cost and how much notice you need to give. The exit timeline tool helps you test how long each step might take. Read more in exit strategies and backup exits.

Risks

Short-term property finance can solve real problems, but the risks are concentrated.

• Exit risk. If the sale or refinance is late, default interest and fees accumulate quickly.
• Valuation risk. A lower-than-expected valuation can reduce the amount you can borrow or make a refinance impossible.
• Enforcement risk. If you default, the lender can generally take steps to enforce its security, which may include selling the property. Read default and enforcement.
• Personal liability risk. Personal guarantees can expose your own assets if a company borrower cannot repay.
• Cost creep. Extension fees, legal costs and default interest can erode equity faster than borrowers expect.
• Fewer protections. Business-purpose loans generally sit outside consumer credit law, so dispute options may be narrower.
• Scams. Be wary of anyone asking for large upfront fees before a written offer, or pressuring you to sign quickly. See scams and red flags.

Who uses short-term property finance

Short-term finance is used by a wide range of borrowers, usually because timing or the type of property does not suit a bank:

• Buyers who need to settle before their existing property sells.
• Investors who want to renovate, subdivide or reposition a property before refinancing.
• Developers funding a stage that a bank will not fund, such as pre-development costs or completed stock.
• Business owners who need funds quickly and can offer property as security.
• Borrowers with self-employed or complex income who are refinancing towards a bank once they have the documentation.

If one of these sounds like your situation, the scenarios section walks through examples such as a settlement gap and refinancing a short-term loan.

How it compares to a bank loan

Neither is better in general. A bank loan is usually cheaper if you qualify and have time. Short-term finance is a tool for a specific gap. Many borrowers use it as a bridge to a bank loan rather than an alternative to one.

Regulation

Credit for personal, domestic or household purposes, and for residential investment property, is generally regulated under the National Consumer Credit Protection Act 2009 and administered by ASIC. Lenders and brokers providing regulated credit generally need an Australian credit licence or to be authorised under one. Loans mainly for business purposes are generally not covered. The classification depends on the facts, so ask a lawyer if you are unsure. If you have a complaint about a member firm, the Australian Financial Complaints Authority (AFCA) may be able to help. See financial hardship and complaints.

Documents lenders usually ask for

Requirements vary, but most short-term lenders ask for identification, details of the security property, rates notices, existing loan statements, evidence of the exit, and company or trust documents if the borrower is an entity. Some ask for financial statements or bank statements, particularly where interest is paid monthly. Use the documents checklist and read documents lenders ask for to prepare.

Questions to ask any lender

• What is the total cost over my expected term, including every fee?
• Is interest monthly, prepaid or capitalised, and is unused prepaid interest refunded?
• What happens if I need an extension, and what will it cost?
• What triggers default, and what is the default rate?
• Who pays the valuation and legal fees if the loan does not proceed?
• Are personal guarantees required?
• Which licences do you hold, and which complaints scheme do you belong to?

Before signing, have the documents reviewed by your own lawyer and, where relevant, your accountant. Read reading a term sheet to understand the common clauses.

A hypothetical worked example

Imagine an investor who owns a commercial unit and has signed a contract to sell it, with settlement in five months. They need funds now to secure another property. A short-term lender might advance against the unit, with interest prepaid for the expected term and fees deducted at settlement. The amount the investor actually receives is the loan less the prepaid interest, the establishment fee, the valuation fee and legal costs.

If the buyer settles on time, the sale proceeds repay the loan and the lender discharges its mortgage. If the buyer delays by two months, the investor may face extension fees and default or extended interest for the extra period. Running both versions in the loan cost estimator before signing shows how much a delay would cost and whether the remaining equity can absorb it. This example is illustrative only and uses no real rates.

Common misconceptions

• "The rate is all that matters." Fees, prepaid interest and default terms often matter more.
• "Indicative terms mean the loan is a sure thing." They are not an approval and can change after valuation and due diligence.
• "A refinance is certain once the work is done." Refinance lenders make their own decisions at the time.
• "Short-term loans are only for people in trouble." Many experienced investors and developers use them deliberately to manage timing.

Next step

When you understand your numbers and your exit, you can explore your options with a finance provider through the enquiry page. Privet does not lend or arrange loans, and nothing here is a promise of finance.