Glossary
Capitalised interest
Also called: interest capitalisation, rolled-up interest
Capitalised interest is added to the loan balance instead of being paid as it falls due. The borrower makes no interest payments during the term, but the amount owed grows, and interest may then be charged on the added interest.
An example
A construction loan allows interest to be capitalised until completion. Each month the interest is added to the balance, which is repaid in full from the sale of the finished dwellings.
Why it matters
Capitalising interest helps when there is no income during a project, but it increases peak debt and reduces the equity buffer. Lenders account for it when sizing the loan, so the funds available for the project are lower than the facility limit.
Points to check
Ask how often interest is added to the balance, because more frequent capitalisation increases the debt faster. Check whether the facility limit includes an allowance for capitalised interest and what happens if the loan runs longer than planned and the allowance runs out. Model the balance at the end of the expected term and at the end of a longer term. The difference shows how much a delay could cost and how much equity you might lose at exit.
Try it: Construction drawdown calculator