How private lending works

The idea in plain terms

When people talk about private lending in Australian property finance, they generally mean a loan secured by real estate that comes from someone other than a bank or another deposit-taking institution. The money might belong to a wealthy individual, a family office, a company lending from its own balance sheet, or a pool of investor capital run as a fund. What these sources share is that they do not hold customer deposits. They are therefore not subject to the prudential rules that govern banks, and each can decide for itself which deals it will consider. That freedom shapes almost everything about how a private loan is assessed, priced and repaid.

This lesson walks through the mechanics from the borrower's side. It is general information to help you ask better questions, not advice about any particular loan.

Why borrowers end up with a private lender

Private loans usually fill gaps that mainstream lending leaves open. Typical reasons include:

• Timing. A settlement date, a tax deadline or an unconditional auction contract leaves too little time for a bank's process.
• Income that is hard to evidence. Self-employed people, new businesses or anyone between roles may not fit standard serviceability tests.
• The property itself. Vacant land, a partly built project, a specialised commercial asset or a home needing major repair can fall outside bank policy.
• The purpose. Paying a creditor, funding a business need or covering the gap between two transactions may call for a short facility with a defined end.
• Credit history. Past defaults or a recent insolvency event can rule out a bank without necessarily ruling out a private lender.

None of these reasons makes a private loan cheap or easy. They simply mean the lender is willing to look at the deal on its own facts rather than against a fixed policy.

How a private lender looks at a deal

Banks build most of their decisions around whether your ongoing income can carry a long loan. A private lender tends to reverse that emphasis. Three questions usually dominate the assessment.

What is the security worth?

The lender instructs a valuer and lends a proportion of the assessed value. It also thinks about how quickly the property could be sold if the loan went wrong, which is why location, property type and condition matter as much as the headline figure. The loan-to-value ratio is the starting point, and the ratios lesson explains it alongside the other measures lenders apply.

How will the loan be repaid?

Because most private loans run for months rather than decades, the lender wants a believable exit strategy: a sale, a refinance to a bank or another lender, or a specific incoming payment such as the proceeds of a business sale. A vague plan to sort things out later is one of the most common reasons an application stalls. The lesson on exit strategies and backup exits covers how to build one.

Who is the borrower?

Private lenders still verify identity, review credit history and listen to the borrower's story. They want to know why a bank is not the source of funds, whether the borrower has done this kind of transaction before, and whether anyone else, such as a director or a related party, will sign a personal guarantee.

The usual path from enquiry to repayment

Each lender runs its own process, but most private loans move through a similar sequence.

1. Enquiry. The borrower, often through a broker, describes the property, the amount sought, the purpose and the planned exit.
2. Indicative terms. The lender issues a term sheet setting out the proposed limit, rate, fees, security and conditions. It is usually not binding. The lesson on reading a term sheet explains what to look for.
3. Valuation and checks. The lender orders a valuation, runs identity and credit checks and reviews the documents it has asked for.
4. Formal offer. If the credit team accepts the deal, a letter of offer follows, sometimes on revised terms if the valuation differed from expectations.
5. Loan documents. The lender's solicitor prepares the loan agreement, mortgage and any guarantees. Borrowers and guarantors are commonly asked to obtain legal advice before signing.
6. Settlement. Funds are advanced, the mortgage is registered, and fees or retained interest are deducted from the advance.
7. The term. Interest is paid monthly, added to the balance or drawn from a prepaid amount, depending on the structure agreed.
8. Repayment. The exit event clears the loan, or the borrower negotiates an extension or a refinance.

The preparation checklist lists documents lenders commonly request at the checks stage, which can shorten the gap between indicative terms and settlement.

How private loans are priced

Private loan pricing has two layers: an interest rate and a set of fees. Rates are generally higher than bank rates because the lender is accepting risks a bank has declined and because its own money costs more to raise. Fees can include an establishment fee, the lender's legal and valuation costs, and sometimes a line, extension or exit fee. On a short loan those charges can make up a large share of the overall cost, so the rate on its own tells you little. The interest structures and fees lesson explains each charge, and the loan cost estimator lets you add an offer's interest and fees together over the expected term.

A worked description in words

Picture a hypothetical café owner who owes a supplier and needs funds within a few weeks, with equity in an investment unit but irregular trading income. A bank cannot move quickly enough. A private lender values the unit, sets the advance at a share of that value, and asks how the loan will be cleared. The owner plans to refinance with a bank once a full year of tax returns is lodged. The lender agrees to a short term with interest retained at settlement, takes a first mortgage over the unit and asks the owner to sign a business purpose declaration. Whether that outcome is sensible depends on the refinance actually happening on time.

Regulation in brief

Whether consumer protections apply depends mostly on what the money is for and who is borrowing, not on the type of lender. Credit to an individual mainly for personal, domestic or household purposes, such as buying or refinancing a home to live in, is generally regulated under the National Consumer Credit Protection Act 2009. Credit to an individual to buy, renovate or improve residential investment property can also be covered. A lender offering regulated credit needs an Australian Credit Licence, must meet responsible lending obligations and must belong to AFCA.

Many private loans are made to companies or for business purposes and fall outside that regime. Lenders often ask borrowers to sign a business purpose declaration. Signing one has real consequences, so read it carefully and get legal advice if the money is actually for personal use. General laws against misleading or unconscionable conduct still apply to business lending. The lesson on banks, non-bank lenders and private lenders sets out how each type of lender is supervised.

Common mistakes

• Treating indicative terms as a commitment, when the limit and conditions can change after valuation and credit review.
• Weighing offers by interest rate alone and overlooking fees, retained interest and charges on repayment.
• Planning the exit around the most optimistic sale price or refinance date, with no buffer for delay.
• Assuming the lender will extend the loan if the exit runs late.
• Signing a business purpose declaration without understanding what protections it may remove.
• Skipping basic checks on who the lender is. The guide on how to check a lender shows how to search the public registers.

What to ask before you proceed

1. Are these terms indicative or formal, and what could change them?
2. Who instructs the valuer, who pays, and what happens if the value is lower than expected?
3. What is the total of all fees, and how much will actually reach me at settlement?
4. How is interest charged during the term, and what happens at expiry?
5. Do you treat this loan as regulated consumer credit, and why?
6. Will anyone need to give a personal guarantee?
7. Do you hold an Australian Credit Licence, and are you a member of AFCA?

Related reading

• Refurbishment finance
• Vendor finance
• Private, bank and non-bank lenders
• Scenario: acquiring commercial property
• Scenario: buying before you sell
• Scenario: selling completed stock
• Scenario: refinancing a short-term loan
• Scenario: funding a renovation
• Scenario: a shortfall before settlement
• Scenario: urgent business funding
• Stamp duty in ACT
• Stamp duty in NSW
• Stamp duty in NT
• Stamp duty in QLD
• Stamp duty in SA
• Stamp duty in TAS
• Stamp duty in VIC
• Stamp duty in WA