Costs
How to read a risk fee
Establishment fee, line fee, risk fee, management fee. What each one actually charges you for, and how to reduce four term sheets to a single comparable number.
Private lending term sheets are difficult to compare because the same cost appears under different names, and some of it is expressed as a percentage while the rest is a flat monthly figure. The interest rate is rarely where the difference between two offers actually sits.
The four line items that matter
- Establishment fee - charged once at settlement, quoted as a percentage of the loan amount
- Loan management fee - ongoing, either a flat monthly amount or a monthly percentage of the balance
- Risk fee - a one-off premium reflecting the assessed risk of the specific deal, driven by LVR, security type and location
- Discharge or drawdown fees - transactional, and easy to overlook until they appear on the settlement statement
A flat monthly management fee and a percentage-based one behave very differently as loan size changes. On a small facility a flat fee dominates; on a large one a percentage does. This single difference can reverse which product is cheaper, which is why loan size should be settled before comparing offers.
Why the risk fee moves
A risk fee is not a margin grab, it is a price on variability. The further a deal sits from a straightforward metropolitan first mortgage at a conservative LVR, the wider the range of outcomes if the loan has to be recovered, and the higher the premium. Reduce the variability and the fee falls.
- Lower the LVR - the single most effective lever available to a borrower
- Offer a metropolitan security in place of, or alongside, a regional one
- Take a first mortgage position rather than a second where the structure allows
- Provide a clean, verifiable exit; certainty of repayment is what is being priced
Ask every lender for the total cost of the facility over your expected term, in dollars. Names for fees vary between lenders; a dollar figure does not.
Reduce it to one number
Take the establishment fee, add the management fee multiplied by the months you realistically expect to hold the facility, add the risk fee, then add the discharge cost. Compare that total against the same calculation for every other offer. It is a blunt instrument, but it prices the loan you are actually going to take rather than the one on the front page.
General information only
This article is general in nature and does not take your circumstances into account. It is not financial or credit advice. Alphacon Capital writes business-purpose loans secured by property.
