Dutch interest is a method that charges interest on the entire construction loan amount, even if only a portion has been disbursed to the borrower. This is in contrast to a stage funding loan, in which interest is only charged on the disbursed portion of the loan.
Dutch interest is sometimes used by private money and hard money lenders. It allows the lender to earn interest on the entire loan amount from the very beginning, even if the borrower doesn't actually receive all of the funds until later in the construction process.
Here’s how it looks:
| $1,000,000 | Construction Loan Amount |
| $200,000 | Initial Draw Amount at Closing |
| $800,000 | Construction Financing (holdback of unused funds) |
| 10.000% | Interest Rate |
| $8,333 | First Payment (entire loan amount, including unused funds) |
For borrowers, Dutch interest can add to the overall cost of a construction loan since they’ll pay interest on the entire loan amount from day 1. It’s not ideal, but sometimes it’s the most convenient option available.
For example, FCTD worked with an investor/home builder in Los Angeles who owned a duplex and was permit-ready on two additional dwelling units (ADUs) in the back. The borrower wanted a lender who could close within one week, when the excavator was scheduled to break ground for the foundation. We sourced the loan with a mortgage fund that provided a lower rate using Dutch interest. The lender preferred one set payment from the outset over the complication of instructing the loan servicer when and how much to start charging interest on disbursed construction draws.
Summary
Dutch interest for hard money construction loans is a payment method that charges interest on the entire loan amount even when construction funds haven’t been fully disbursed. It's uncommon, but in certain situations, it works for both the borrower and hard money lender.