Interest reserve

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-01

// THE SHORT ANSWER

An interest reserve is the part of a development facility set aside to pay the loan's own interest during construction, when the project has no income of its own. It is capitalised — added to the debt rather than paid in cash — so the facility grows through the build, and the reserve is a line in the project budget like any other. The desk sizes it from the build programme and the rate, and reads a delay as a draw on it: a project that runs late consumes its interest reserve, and the interest still to come becomes a cost-to-complete gap the developer must fund before the bank advances more.

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.