What Property Developers Need to Know About Finance

When it comes to property development finance one of the most common loan structures developers use is a capitalised interest loan. It’s a practical solution to a very real problem: most property developments don’t generate income during construction, yet loan interest continues to accrue.
Understanding how capitalised interest works — and how  lenders assess it — is essential for developers looking to structure funding correctly and protect their profit margins.

Why Capitalised Interest is Common

Property development is cash intensive, particularly in the early and middle stages of a project. Developers are paying for land, consultants, approvals and construction long before any sales revenue comes in. In this environment, making monthly loan repayments can place unnecessary pressure on cash flow.

Capitalised interest exists to solve this issue. Instead of requiring ongoing repayments, interest is added to the loan balance and paid at the end of the project. This approach is widely used in development loans across Australia because it aligns the loan structure with how development cash flow actually works.

What Is a Capitalised Interest Loan?

A capitalised interest loan is a type of property development loan where interest is not paid monthly. Instead, the interest accrues over the life of the loan and is capitalised — meaning it is added to the loan balance.

The full loan amount, including all accumulated interest and lender fees, is repaid once the development is complete. This usually happens when the finished properties are sold or the project is refinanced into longer-term investment debt.

How Capitalised Interest Is Included in Development Finance

When Australian banks assess property development finance, they look at the entire project, not just the build cost. This includes land acquisition, professional fees, contingencies and the interest expected to accrue over the loan term.

The lender estimates total interest based on the construction period, loan drawdowns and interest rate buffers. That interest is included in the Total Development Cost, and the approved loan limit is structured to cover it. Even though interest isn’t paid during construction, it’s treated as a real and unavoidable cost from the start.

How Interest Accrues During Construction

Development loans are drawn down progressively as construction milestones are reached. Interest is charged only on the amount drawn, not the full loan limit.

Early in the project, interest costs are relatively low because only a portion of the loan has been used. As construction progresses and more funds are drawn, interest increases. If the project runs longer than planned, interest continues to accrue, which directly impacts the final profit.

This is why time delays are one of the biggest risks in property development funding.

How Banks Assess Capitalised Interest 

 Lenders are comfortable with capitalised interest, but they assess it conservatively. Banks focus on the developer’s margin after all costs, including interest, and test how the project performs if construction is delayed or interest rates increase.

They also assess whether capitalised interest pushes the loan beyond  loan-to-value (LVR) limits. If it does, the lender may reduce the loan amount or require additional equity from the developer.

When Capitalised Interest Ends

Capitalised interest usually stops once construction is complete and the project reaches its exit point. This may involve selling the completed dwellings or refinancing into long-term investment loans.

At this stage, the loan balance includes the original borrowed amount, all capitalised interest and any lender fees. The loan is then repaid from sale proceeds or restructured as part of the exit strategy.

How It Works In Practice 

To see how this works in practice, consider a small townhouse development with a total project cost of $3 million. The bank agrees to fund 65% of the project using a development loan with capitalised interest.

Construction takes 15 months, and the loan is drawn down progressively. Over that period, around $180,000 in interest accrues and is added to the loan balance. The developer doesn’t make monthly interest payments during construction.

When the project is completed and sold, the full loan balance — including capitalised interest — is repaid. Any delays would have increased the interest cost and reduced the final profit, highlighting why time management is so important in property development.

Benefits of Capitalised Interest Loans 

Capitalised interest loans improve cash flow during construction and reduce reliance on personal income. They allow developers to direct capital toward delivering the project rather than servicing debt and make larger or more complex developments more achievable under traditional property development finance.

Risks Developers Need to Understand

While capitalised interest helps with cash flow, it doesn’t remove risk. The final loan balance is higher, and any delays or interest rate increases directly reduce profit. Capitalised interest shifts repayment risk to the end of the project, which makes a strong and realistic exit strategy essential.

How Can Developers Use Capitalised Interest Wisely

Experienced developers tend to build conservative timeframes into their feasibility studies, allow buffers for interest rate movements and focus heavily on finishing projects on time. They understand that in property development finance, time is just as important as cost.

Capitalised interest loans are not a shortcut or a loophole. They are simply a practical and widely accepted way to structure property development loans.

Used correctly, they reduce cash flow pressure and support smoother project delivery. Used without realistic assumptions, they can quietly erode margins. For developers seeking long-term success, understanding how capitalised interest works — and how lenders view it — is critical.

Want to learn more?

Please click on the links below to view articles in our three part series on Property Development 

Part 1: The Best Structure for Property Developers
Part 2: What Property Developers Need to Know About Tax
Part 3: What Property Developers Need to Know about Finance