Interest reserve

An interest reserve is a sum set aside from the facility, usually funded at the first drawdown, specifically earmarked to cover interest payments through the term rather than requiring the borrower to service interest from other income. It achieves a similar practical outcome to capitalising interest — the borrower does not need cash flow to cover interest during the term — but is structured as a defined, ring-fenced amount rather than an open-ended addition to the loan balance each period. Lenders size the interest reserve against the expected term of the facility, and a reserve that runs out before the exit is achieved leaves the borrower needing to fund interest from elsewhere or renegotiate the facility. Interest reserves are common on construction, land bank and bridging facilities where the project or asset generates no income until completion or sale, giving both lender and borrower certainty over how interest through the build is being funded.

Related

Construction finance · Capitalised interest · Drawdown