The Real Cost of Capital Isn’t Always the Interest Rate
IIn property finance, everyone obsesses over the rate. It’s the number that anchors every negotiation and makes headlines in every press release. Yet ask any seasoned borrower who’s refinanced a large-scale facility early, and they’ll tell you the truth:
the rate isn’t the real cost.
The true economics of a loan often hide in the clauses that govern what happens when your strategy changes—when you deliver faster than planned, when you refinance at better terms, or when the market shifts beneath you.
In 2025, with
private credit now a dominant source of large-ticket real-estate finance, those clauses—make-whole, prepayment, and break costs—define the boundary between flexibility and friction. They determine whether early success feels rewarding or punishing.
As we explained in
Private Credit vs. Private Banking: Choosing the Right Partner for Large Property Finance, today’s lending market is about structure, not slogans. Borrowers who negotiate intelligently don’t just secure capital—they preserve control.
Why Early Repayment Isn’t Free
Every lender, whether a clearing bank or a private fund, prices for predictability. Capital has a cost of time attached. When a borrower repays early, that rhythm breaks.
For traditional banks, early repayment disrupts treasury forecasting and funding spreads. For private credit funds, it disturbs investor yield expectations. Their solution? Clauses designed to compensate for that disruption.
These are not punitive by design—they’re mechanical. They ensure the lender achieves its modelled return. The problem arises when borrowers don’t model the same assumptions themselves.
When we explored timing risk in
Funding Large-Scale Development Projects in 2025, one recurring theme was that institutional borrowers plan their exits around make-whole and break-fee windows. Private borrowers rarely do. The result is that they celebrate a successful exit only to see profit shrink at completion because of a contractual “cost of success.”
Understanding Make-Whole Provisions
A make-whole clause exists to protect a lender’s yield. It says, in essence: If you repay before we’ve earned what we expected, you’ll pay the difference.
In a standard private-credit facility, that protection takes the form of a
non-call period—perhaps twelve months on a two-year loan, or two to three years on a five-year structure. During that window, early repayment triggers a fee equal to the interest that would have accrued for the rest of the period.
It sounds harsh, but it’s entirely logical. The lender’s investors—often pension funds or family offices—expect steady income. Breaking that flow early forces the fund to reinvest capital in a less predictable market.
For the borrower, the mistake is assuming that a low margin offsets everything else. A 6.5% facility can quickly become a 10% facility if you’re forced to pay a year’s interest to exit early.
In
Refinancing High-Value Assets: Turning Illiquid Holdings into Strategic Liquidity, we showed how refinancing can unlock equity efficiently—but only when timing and structure align. The same principle applies here:
flexibility has a price, and it’s always cheaper when negotiated at the start.
Prepayment Fees: The Softer Side of Flexibility
Prepayment provisions are a more forgiving cousin to make-wholes. Instead of demanding all future interest, they apply a sliding-scale fee on any amount repaid early—often one to three per cent, tapering down over time.
For private banks and structured-debt platforms, these fees create a middle ground: borrowers gain some freedom, and lenders maintain yield predictability. The key, however, lies in the details.
A well-drafted facility can include
partial prepayment rights, allowing borrowers to pay down capital as sales complete or surplus cash builds—without triggering full penalties. That’s invaluable for developers selling units in phases or landlords reshaping portfolios over time.
When we discussed phasing and liquidity management in
Development Finance in 2025: What’s Changed and What Lenders Want Now, this was a major shift: lenders are becoming more open to flexible repayment mechanics, provided the commercial rationale is clear.
The art, therefore, isn’t to eliminate prepayment fees—it’s to
shape them around your cash-flow reality.
Break Costs in Fixed-Rate Loans
Break costs operate differently. They arise when loans are hedged through interest-rate swaps or forward-funding structures. If a borrower exits early, the lender must unwind the hedge, and the gain or loss becomes the borrower’s responsibility.
This isn’t punitive—it’s market mathematics. If rates have fallen since the hedge was set, the unwind produces a loss for the lender, which you must cover. If rates have risen, the hedge may be in your favour, and the lender might offset or waive the charge.
The scale of these costs became clear after the volatility of 2023–2024, when borrowers who hadn’t modelled break-cost exposure discovered six-figure surprises mid-transaction. Those who had negotiated
symmetrical clauses—sharing upside and downside—escaped far more lightly.
Understanding how hedging risk fits within the broader loan structure is something we explored extensively in
Interest-Only Mortgages in 2025: Smart Uses and Risks Explained. The lesson is simple: when you fix your rate, you’re also fixing your flexibility.
Negotiation Is About Optionality, Not Price
Experienced borrowers view term sheets as frameworks for
optionality, not fixed offers. Every clause—from the non-call period to the fee-reduction schedule—can be rebalanced.
A lender might, for instance, agree to a
step-down make-whole, where the penalty decreases each quarter after the first year. Others may accept a conversion: after completion or stabilisation, the make-whole transforms into a lighter prepayment fee.
These aren’t theoretical concessions; they’re now common among private funds seeking to win competitive mandates. They reflect a maturing market where flexibility is a tradable commodity.
When negotiating, it helps to think institutionally. As noted in
Funding Large-Scale Development Projects in 2025, family offices and experienced developers increasingly apply institutional-grade analysis to private deals. They model early exits, delayed completions, and refinancing windows—then price each scenario.
Borrowers who do the same rarely get caught off guard. Those who don’t, often pay for flexibility they could have negotiated for free.
Modelling the True Cost of Flexibility
It’s easy to fixate on the rate differential between lenders—a quarter point here, fifty basis points there. But once you factor in prepayment fees and make-wholes, the cheapest facility on paper can be the most expensive in practice.
At
Willow Private Finance, we often model three scenarios for clients before signing:
- Running the loan full-term
- Refinancing early
- Partial repayment through phased sales or cash sweep
The comparison is eye-opening. In some cases, a slightly higher-rate facility with generous prepayment flexibility delivers a better total return than a lower-rate, fully locked structure.
The principle mirrors our analysis in
The Paradox of Wealth: When Value Isn’t Liquidity: liquidity has value. Paying a little more for it can be the difference between a controlled exit and a forced compromise.
Why Borrowers Must Think Like Lenders
Institutions never assume things will go to plan. They model for disruption—and price accordingly. Private borrowers can adopt the same discipline without losing agility.
That means understanding your own
duration risk. If your business plan relies on an early exit, negotiate as though it’s guaranteed. If your intent is to hold long-term, ensure you have the right to de-gear without penalty.
It’s a mindset shift: viewing clauses not as fine print but as tools. With that approach, the conversation moves from “What’s your rate?” to “What does this loan allow me to do?”
For borrowers managing multiple assets or cross-border structures, this philosophy aligns perfectly with the liquidity strategies covered in
NAV-Based Lending in 2025: When Your Portfolio Becomes the Facility and
Securities-Backed Lending in 2025: The Definitive Guide for HNW Borrowers, Developers, and Advisers. Both emphasise using total wealth efficiently rather than letting capital remain idle—or trapped.
How Willow Private Finance Can Help
At
Willow Private Finance, we don’t measure success by the rate alone. We measure it by what that rate allows our clients to achieve.
Our team negotiates not only margin and leverage but the subtleties that decide profitability—make-wholes, prepayment options, step-downs, and break-cost symmetry. We bring a lender’s eye to a borrower’s agenda, ensuring every clause serves the client’s plan.
Whether you’re refinancing a development, raising capital for acquisition, or transitioning to a family-office-style portfolio structure, our role is to help you
understand the real economics—and use them to your advantage.
Frequently Asked Questions
What are make-whole clauses in property loans?
They’re provisions that compensate lenders for lost interest if you repay early, ensuring their expected yield is protected.
How do prepayment fees differ?
Prepayment fees are usually smaller, fixed percentages that taper down over time, offering borrowers more flexibility.
Can these costs be negotiated?
Yes. Step-downs, partial prepayment rights, or milestone-based conversions can significantly reduce the impact if structured well.
Are break costs avoidable?
Only if you understand your hedge exposure upfront. Break costs arise from fixed-rate or swap structures and reflect real market losses.
How can Willow Private Finance help?
We model and negotiate all early-exit economics to ensure flexibility is cost-efficient—protecting returns without overpaying for control.
📞 Planning a Refinance or Early Exit?
Book a free strategy call with our
specialist advisers today.
We’ll help you structure lending that protects flexibility, limits break costs, and maximises return.
