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
Start with the interest: the loan amount, times the rate, times the months you realistically expect to hold the facility, divided by twelve. Add the establishment fee, the management fee for the same number of months, the risk fee, and 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.
| Cost | Offer A | Offer B |
|---|---|---|
| Rate | 9.00% p.a. | 9.50% p.a. |
| Interest for 6 months | $45,000 | $47,500 |
| Establishment fee | 2.50% = $25,000 | 1.65% = $16,500 |
| Management fee | $1,500 a month = $9,000 | 0.10% a month = $6,000 |
| Risk fee | 1.00% = $10,000 | 0.50% = $5,000 |
| Discharge fee | $1,000 | Nil |
| Total cost | $90,000 | $75,000 |
The offer with the lower rate costs $15,000 more over six months. Held for longer, interest takes a bigger share and the gap narrows - which is why the holding period has to be settled before the comparison means anything. The figures are illustrative, not either lender's actual pricing.
Every fee on one page
The Alphacon rate card lists the establishment, management and risk fees for all five products, so you can run the total-cost calculation before you call.
Compare all productsGeneral 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.
