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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Capitalised interest (funded interest)

What is capitalised interest, and why does it make a development loan grow?

ONE OF 209 TERMS · FREE · NO SIGNUP

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

Capitalised interest is interest added to the loan instead of being paid in cash, so the debt grows each period by the interest charged on it. Development and construction loans use it because the project earns nothing until it is finished: the interest is funded from the facility, and the limit must be large enough to carry it to completion. A lender sizes the loan with that interest included and tests it against the end value, because a delay adds interest without adding anything to sell.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WHAT IT IS NOT

An interest reserve is the budget line or account set aside to meet interest; capitalised interest is the mechanism of adding it to the debt. A development loan often has both.

// WORKED IN

// NEXT TO IT

PROPERTY AND DEVELOPMENT

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