Construction loans with private lending

Popularity in Private Lending Grows

A Rapid Increase in Private Lending (Particularly in Property Development)

Construction loans with private lendingOver the past year, Australian banks and large mortgage companies experienced a marked lending slow down. The limits on the number of interest-only (IO) loans put in place by the Australian Prudential Regulation Authority (APRA) sparked this cooling initially. At the same time, the tighter restrictions on banks opened up another significant lending tier.

Why Does Private Lending Exist?

As a response to tighter restrictions and increased rejections from banks and larger lending institutions, substantial numbers of borrowers now work with private lending sources.

Is Private Lending the Best Option for All Borrowers?

The group of borrowers best served by private funding sources are investors seeking loans to develop land, property and businesses; as opposed to an individual or family seeking a loan to purchase a dwelling for a single family.

Are There Specific Kinds of Developers Who Stand to Gain More Than Others With Private Lenders?

Construction LendingFor the most part, those receiving the most significant benefit from seeking private funding include:

What Are the Interest Rates on These Type of Loans?

Generally speaking, anytime an interest-only loan is a part of the equation, the borrowers should expect to see higher rates than on a traditional principle and interest loan. A higher rate of interest offsets a greater risk on the part of the lender.

Are There Any Advantages to Obtaining An Interest Only Loan if Rates Are Higher?

  • Paying only the interest frees up funds to use for other investments or to offset other business costs
  • More control of fund disbursement
  • Maximise tax deductions on interest payments
  • Presently, there is a higher approval rate for investors seeking loans from private lenders as opposed to the banks or larger lending institutions

What Is the Projected Outlook For Private Lending, Given The Current Situation?

Even though APRA repealed its interest-only loan cap, many of the large banks and other major lending institutions persist with the 30 per cent limit of interest only loans. Because numerous banks are still operating by the old rules, many potential borrowers hear the word ‘no’ from the large lending institutions.

This situation created a perfect environment for private funding to blossom and flourish. The industry experts see the number of private lenders growing at an unprecedented rate. At this present time, there is no noticeable reason for this trend to drop off anytime soon.

Even if the big banks and large lenders begin to amend their policies regarding the lifting of the APRA limits, they will remain the primary domain of residential homeowners and borrowers. This makes sense because the banks look to use a residential home loan to build additional financial relationships with the individual borrowers.

This good news to those potential borrowers who are interested in obtaining interest-only loans; the influx of backers allows room for competitive interest rates.

Who is Borrowing and Creating Growth in The Private Funding Sector?

Development in Perth CityTraditionally, clients seeking private funding are looking for construction loans either for new construction or for work considered as ‘off-plan’ or amended work plans.

We also see investors looking to expand or improve property that is presently developed, such as adding storefronts to a shopping centre or renovating office complexes to attract more tenants.

There is an overall heightened level of interest in the area of commercial property at this time. According to a report from, a new type of investor is entering into the realm of investing in commercial properties.

Due, in part, to cooling in residential markets, many of the investors turning to commercial property investment and private financing, are family investors. Frequently referred to as ‘mum and dad’ investors, this sector of often first-time investors is impressed by the commercial real-estate boom in Australia.

During the financial year of 2018, 19 billion dollars worth of properties changed ownership. Part of this impressive statistic comes from the influx of mum and dad investors.

What Is Drawing Mum and Dad Investors Toward Commercial Property Investment and Private Finance?

A number of factors are responsible for bringing this investing demographic into the area of commercial property investment and private funding. The influences adding to the attractiveness for mum and dad borrowers include:

  • Reduced government intervention
  • A residential market that is no longer the hub of investment activity
  • A general shift away from reliance on residential property as a money-making venture
  • The nation is experiencing generally low vacancies in storefronts, multiple-unit housing, mixed-use structures and other types of commercial property
  • Higher yield on commercial property investments
  • The latitude to negotiate and agree on attractive lease terms
  • The opportunity to have a say in tenants

Who Are The Sources Of Private Funds and Why Are They Lending Out Their Money?

While there may be a stereotype of a brilliantly wealthy tycoon lending money from the deck of a yacht, a more realistic image is that of a hardworking individual with the foresight to know a smart investment plan. Some funding sources are foreign, and others are Australians.

Additionally, there’s companies like Quantum Finance and Quantum Capital Australia that have access to a huge pool of private funds.

Sealing a private lending deal

Those in the business of lending their money typically do so because it is a profitable venture which often comes with the satisfaction of assisting a smaller businessperson in the growth of their venture. Additionally, as the source of funds, they absorb smaller risks than the property owner.

There is no denying the challenges investors weathered recently. However, as the dust settles a bit more, many property investors find there are numerous advantages to entering into interest-only loans with private lenders.

For the present, opting for loans from private sources of funding will likely remain the domain of those interested in purchasing a property for developing as a form of investment as opposed those seeking a loan for an owner-occupied dwelling. The influx of funding from private lenders will open doors to new opportunities in the commercial property sector.

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    ** Comparison rates are based on a loan of $150,000 over a term of 25 years. WARNING this comparison rate applies only to the example given. Different amounts and terms will result in different comparison rates. Costs such as economic cost and cost savings such as fee waivers are not included in the comparison rate but may influence the cost of the loan.

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