How private credit returns of 12–18% are generated (and what they pay for)

Private credit returns of 12% to 18% are generated by the interest borrowers pay for speed, short terms and flexibility that banks do not offer. What an investor actually receives depends on the structure. In a pooled fund, fees and margins can sit between the borrower’s rate and yours. In direct co-funding, your rate is written in your loan agreement.

HomeSec Business Finance, an Australian private lender founded in 2004, has been lending its own money on these terms since then, and invites wholesale investors to co-fund some loans alongside it. This insight follows the money: why borrowers pay what they pay, where it goes, and what the return is compensating you for.

Where does a private credit return actually come from?

Every dollar of return in private credit starts as interest paid by a borrower. There is no other source. A fund can add leverage, hold cash or charge fees, but the underlying engine is the same: someone borrows money secured over an asset and pays interest until they repay it.

So the first question for any return is simple. Why is the borrower willing to pay this rate?

The second question is what happens to the interest on its way to you. In some structures, most of it reaches the investor. In others, a meaningful share is kept by the manager, and the investor is never told how much. Both questions matter, and most marketing only answers the first.

Why do borrowers pay 12% or more?

Because they are buying speed, and speed has a price.

A bank may take two to three months to approve a business loan, or ask for two years of financial statements before it will start. A private lender such as HomeSec can issue a letter of offer within hours and settle within days. For a business owner with a property purchase to settle, an opportunity to secure or a timing gap to bridge, that difference can decide whether the deal happens at all.

The loans are also short, from 1 to 12 months. A borrower paying a double-digit annual rate for three or four months pays a modest amount in dollars compared with the value of what the money unlocks. That is why most borrowers are established, thriving businesses using equity in their property. They pay a premium for speed and flexibility, not because a bank has turned them away for weak credit.

What is the higher rate compensating investors for?

From the lender’s side, a double-digit rate is payment for several things at once:

• Illiquidity. Your money is committed for the term of the loan rather than sitting at call.
• Concentration. One loan is one borrower and one property, not a portfolio of hundreds.
• Credit risk. Borrowers can default, and recovering a loan takes time.
• Being ready to act. Borrowers pay for money that is available quickly, so lenders are paid for having it ready.

Those are real risks, and a higher return exists because they exist. HomeSec manages them with a maximum 80% LVR on residential property (lower on commercial), no development or construction loans, terms of 1 to 12 months, and its own money in every loan. The full picture is in risks and protections.

What moves the rate on an individual loan?

Within the 12% to 18% range, each loan’s rate is set loan by loan. The same factors that drive risk generally drive price.

• Position. A second-ranking mortgage carries more risk than a first on the same property, so it is generally priced higher.
• LVR. More equity above the debt means a bigger buffer, which usually supports a lower rate.
• Property type. Commercial property can take longer to sell than a standard home, and is lent against at lower LVRs.
• Term and exit. A short loan with a clear, evidenced exit is a different proposition from a longer loan relying on a future sale.

Reading these together, over several packs, is the best way to judge whether a rate is fair for the risk. The rate is never the whole story: a loan at the top of the range is not automatically better than one at the bottom.

Where do the fees go in a pooled fund?

In a pooled private credit fund, the interest borrowers pay passes through the manager before reaching investors. Along the way, several things can be taken out: management fees, performance fees, the costs of holding cash, and in some funds, fees and margins that investors never see.

ASIC’s 2025 surveillance of 28 private credit funds found that:

• Three wholesale funds kept up to 100% of the origination fees paid by borrowers without disclosing the amount, rate or range.
• Not all managers passed on to investors all the interest received from borrowers; some kept a net interest margin as an additional source of income.
• One wholesale fund kept the extra default interest paid by borrowers in full, rather than passing it to the investors bearing the risk.
• Only four of the 28 funds published the rates charged to borrowers.

ASIC had earlier flagged opaque remuneration and fee structures as a concern across the $200 billion sector. None of this means every pooled fund is doing it. It means that, in a pooled fund, you often cannot tell how the borrower’s rate compares with your distribution.

How is direct co-funding different?

In direct co-funding, the loan is yours. The rate you will earn is shown in the loan’s due diligence pack before you decide, and it is written into the loan agreement prepared in your name. Principal and interest are paid directly to your own bank account, not to HomeSec and not into a fund.

HomeSec earns mostly when loans are repaid, and its own money sits in the same loan as yours. That alignment matters more than any fee table: the lender that chose the loan is exposed to it in exactly the way you are. Our guide to direct mortgage investment vs pooled funds sets out the other structural differences.

How do 12–18% returns compare with other investments?

The table below uses published figures as at September 2026. The comparison is about income, not like-for-like risk: each investment carries different risks, volatility and liquidity.

Over the same 30 years, cash returned 4.0% a year and inflation averaged 2.7%. Share returns include capital growth and come with years of sharp falls. A secured loan’s return is contractual interest; it does not grow, and the risk is concentrated in whether the loan is repaid. For more options, see our comparison of alternatives to term deposits.

What does 12% to 18% look like in dollars?

Some simple illustrations on a $250,000 contribution, before tax:

Interest on these loans is not subject to GST, because lending is an input-taxed financial supply. Income tax depends on who holds the investment: an individual, company, trust or SMSF. Our returns page covers more examples.

Is a double-digit return too good to be true?

It is a fair question, especially after the Shield and First Guardian collapses, where thousands of Australians’ super ended up in funds they could not see inside.

The test is not the size of the number. It is whether you can see where it comes from. Can you see the specific loan, the property and the borrower? Is your name on the security? Does the manager have its own money in the same loan? Does the interest come straight to your account? If the answers are yes, the return has a visible source: a named borrower paying a stated rate for a short term loan.

During the GFC, when most ordinary super funds posted negative returns, HomeSec’s co-funders kept earning their loan returns. That is what a return built on contractual interest from secured loans looks like when markets turn.

Want to see where the return comes from on a real loan?

Every pack shows the loan, the property and the borrower, the rate and the risks. If you’d like to see one, register your interest and our Funding Manager will be in touch.