Glossary

Capitalised interest

What capitalised interest means, how it changes a facility's balance over time, and why it suits projects with no interim income.

Capitalised interest is interest added to the loan balance each period rather than paid in cash by the borrower as it accrues, so the facility balance grows over the term and the full amount, principal plus accrued interest, falls due at the exit. It is common on construction, land bank and bridging facilities where the project generates no income until completion or sale, and where requiring monthly cash interest payments would defeat the purpose of the facility. For a borrower, capitalised interest preserves cash flow during the term but means the exit needs to cover a larger balance than the amount originally drawn, which is why lenders check the exit and the project's margin closely before agreeing to capitalise rather than requiring serviced interest. Some facilities capitalise interest up to a set limit or loan-to-value threshold, beyond which further capitalisation is not permitted.

Related

Construction finance · Interest reserve · Exit strategy

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