No repayments for six months: how capitalised interest works

What the presenter says

The core of this Short explains how a loan secured on property is assessed: the equity is the security, so the credit file, the financials and recent trading are not the deciding factors. The line it opens and closes on, and the one this page is about, is the repayment-free period: no repayments for the first six months, which the presenter calls breathing room to sort out a problem, steady the cash flow or line up the next move. That is a fair description, as long as it is clear where the interest goes.

What "no repayments" actually means

Interest is charged from the day the funds are released. During the capitalised period it is not paid month by month; it accrues and is added to the loan. Nothing is waived. The trade is between paying interest out of cash flow now and paying it out of the exit later. For a business that is short of cash this month, that difference can decide whether it trades through. For the total cost of the loan, it is not a discount, and nobody should borrow on the belief that it is.

It is also optional. HomeSec's two repayment options are interest-only, or interest capitalised for up to 6 months, and the borrower chooses. There are no daily or weekly direct debits on either.

When capitalising makes sense, and when it does not

• The exit is a lump sum. A property sale, a bank refinance or a large receivable will repay everything at once, so there is little point draining cash flow before it arrives.
• The money earns later. Stock bought ahead of a season, equipment that has to be installed before it produces, or a contract that pays on completion.
• The pressure is temporary. An ATO debt cleared in one payment, or the gap between two progress claims.
• Not when the shortfall is permanent. If the business cannot meet its ordinary costs and nothing ahead changes that, six months without repayments only makes the eventual balance larger.

Repaying early, and what comes after

The term is open, so the loan can be repaid whenever the exit arrives. If that happens inside the capitalised period, the months of capitalised interest you did not use are rebated, and repaying early costs nothing extra. After the period, a borrower can pay interest only, make paydowns from $10,000, or repay in full. How the open term works is the subject of the video on flexible-term business loans, and what a private business loan costs lists every fee that applies, which is a short list.