Two Ways to Handle Interest on Your Second Mortgage
When you take out a second mortgage, one of the most important decisions you'll make is how you want to pay the interest. There are two options: non-capitalised (you pay monthly) or capitalised (interest rolls into the loan). Each has distinct advantages depending on your situation.
Non-Capitalised Interest Explained
With non-capitalised interest, you make regular monthly interest payments throughout the life of the loan. Your principal balance stays the same, and at the end of the term, you repay the original amount borrowed.
Example: You borrow $200,000 at 1.99% per month. Your monthly interest payment would be $3,980. At the end of your 12-month term, you still owe $200,000.
Best for:
- Businesses with steady monthly cash flow
- Borrowers who want to minimise total interest paid
- Those who prefer predictable ongoing costs
- Situations where the loan will be held for the full term
Capitalised Interest Explained
With capitalised interest, no monthly payments are required. Instead, the interest accrues and is added to your loan balance. You pay everything — principal plus accumulated interest — at the end of the term.
Example: You borrow $200,000 at 1.99% per month with capitalised interest over 12 months. Your interest compounds, and at the end of the term you'd owe approximately $253,600.
Best for:
- Business owners who need maximum cash flow right now
- Property developers waiting for a sale or refinance
- Short-term bridging situations where funds are expected soon
- Investors who want every dollar deployed into their venture
The Real Cost Comparison
It's important to understand that capitalised interest costs more in total because interest compounds on interest. However, the value of having those funds available month-to-month can far outweigh the additional cost.
Consider a business owner who borrows $200,000 to purchase stock. If that stock generates $50,000 in profit over 6 months, the additional interest cost of capitalisation is easily justified by not having to divert cash flow to monthly payments.
Which Should You Choose?
Ask yourself these questions:
- Can your business comfortably make monthly payments? If yes, non-capitalised keeps costs lower.
- Do you need maximum working capital? If every dollar matters for your project, capitalised interest frees up cash flow.
- How long will you hold the loan? For shorter terms, the difference between capitalised and non-capitalised is smaller.
- What's your exit strategy? If you're expecting a property sale or refinance, capitalised interest aligns payments with your liquidity event.
Not Sure? That's Normal
If you're unsure which option suits your situation, you're not alone. Many applicants choose "Unsure/Undecided" on their application, and our team will walk you through both options based on your specific circumstances.
The right choice depends on your business model, cash flow patterns, and what you're using the funds for. There's no universally "better" option — just the one that fits your situation.
