If you have received a quote for development or construction finance, you may have seen a line fee listed alongside the interest rate. It is easy to overlook, but the charging basis and quoted period can materially affect the total cost of a facility.
Understanding how a line fee works makes it easier to compare offers on a like-for-like basis. This is particularly relevant to development and construction loans, where funds are usually advanced in stages rather than as a single lump sum.
Line Fee Meaning Explained
A line fee is a fee charged for keeping an approved facility available. Depending on the lender and term sheet, it may be calculated on the total facility limit or on the undrawn portion. It is separate from interest, which is generally calculated on the drawn balance.
The distinction matters because a development facility is usually drawn progressively. Interest reflects the amount advanced, while the line fee reflects the lender’s commitment to keep the remaining approved facility available, subject to the loan terms.
Why lenders charge a line fee
When a lender commits a facility, it must maintain the funding capacity and capital allocation needed to meet future drawdowns. A line fee compensates the lender for that commitment, including periods when the approved facility remains partly undrawn.
This is particularly relevant to staged lending. On a construction loan, funds are released through approved progress payments, so the drawn balance may sit below the facility limit for much of the term. Where interest is charged on the drawn balance, a separate line fee may apply to the total or undrawn commitment.
What the fee is charged on
Not all line fees are calculated the same way, and the basis matters more than the headline percentage. A line fee may be charged against the total facility limit, which means you pay on the full approved amount, regardless of how little you have drawn. Alternatively, it may be charged only against the undrawn portion, which reduces as you draw the loan down.
The difference can be significant. On a facility where most of the funds sit undrawn for months, a fee charged on the full limit costs considerably more than one charged on the undrawn balance alone. Before you compare two offers, it is worth confirming which basis each lender is using, because two identical percentages can produce very different costs.
Monthly versus annual line fees
Here is where borrowers most often seek clarification. Some lenders quote a line fee on an annual basis, while others quote it monthly, and the two can look almost identical at a glance.
Consider a line fee quoted at 0.25 percent. If it is 0.25 percent per annum, the annual rate is 0.25 percent. If it is 0.25 percent per month, the simple annualised rate is 3.0 percent per annum before considering the charging base. The number looks the same, but the annualised cost is very different. Never assume the quoted period from the type of lender; confirm it in the term sheet.
Confirm whether the rate is monthly or annual, then calculate the dollar cost against the relevant charging base and expected term. Annualising fees helps place offers on a common basis, but the final comparison should also reflect the likely drawdown profile, extension fees and other conditions.
How a line fee differs from other costs
A line fee is only one part of the total cost of finance. It sits alongside interest on drawn funds and an establishment fee, which is typically calculated as a percentage of the facility and may be paid or capitalised at commencement. Extension, drawdown, valuation, quantity surveyor, legal and early repayment costs may also apply.
Because these costs interact, the headline interest rate does not tell the whole story. A loan with a lower rate and a monthly line fee may cost more than a loan with a higher rate and no line fee, depending on the drawdown profile and term. Our guide to lender’s fees explains how the main charges fit together.
What this means when comparing lenders
The practical takeaway is that a line fee should not be read in isolation. Three questions determine its practical cost: what balance is charged, whether the rate is monthly or annual, and how long the facility is expected to remain available. Confirm each before comparing offers.
More broadly, a funding offer is more than the sum of its rates and fees. The charging basis, loan term, extension provisions and conditions all shape cost and execution risk. Our guide on what to look for in a term sheet covers the wider issues to check before committing to a lender.
Talk to ASAP Finance about your funding costs
Better decisions are made when the cost of finance is clear from the start. At ASAP Finance, our term sheets set out how interest and fees are calculated so borrowers can assess the expected cost over the life of the facility.
If you are comparing development or construction finance and want to understand the full cost of a proposed facility, get in touch with the team at ASAP Finance to talk it through.