Dutch Interest Explained: What It Costs on a Rehab or Construction Loan

What Dutch interest means

Most fix and flip and ground-up construction loans aren’t funded all at once. The lender advances part of the loan at closing, usually toward the purchase or the land, and holds back the rehab or construction budget. That holdback is released in draws as the work is completed and inspected. Our guide on how draws work covers that process in detail.

The question Dutch interest answers is simple: on which balance do you pay interest?

• Dutch interest (sometimes described as interest on the full loan, full commitment or total loan amount): you pay interest on the entire loan, including the undrawn holdback, from closing until payoff.
• Non-Dutch interest (often described as interest on funds disbursed, drawn or outstanding): you pay interest only on the money that has actually been advanced to you, so your interest grows as draws are funded.

The origin of the name isn’t well documented, and the term isn’t used uniformly. Some term sheets never say “Dutch” at all. What matters is the wording that describes the interest base, which we cover below.

Why some lenders charge Dutch interest

From a lender’s point of view, an undrawn holdback isn’t free. The lender has committed that money to your project and typically has to keep it available, either as cash on hand or as capacity on its own credit line, so it can fund your draws on schedule. Dutch interest is one way to be paid for that commitment.

Lenders that charge interest only on disbursed funds may recover the same cost elsewhere, for example through a slightly higher rate, more points, or draw fees. That is why Dutch interest isn’t automatically a bad deal. A Dutch loan at a meaningfully lower rate can cost less than a non-Dutch loan at a higher one. The only way to know is to calculate the total interest on your actual draw schedule.

Worked example: a fix and flip with a $100,000 holdback

Here is a hypothetical flip. The numbers are illustrative, not a quote.

• Total loan: $300,000
• Funded at closing: $200,000 (toward purchase)
• Rehab holdback: $100,000, drawn in four $25,000 draws at the end of months 1 through 4
• Rate: 11% interest-only
• Hold: 6 months

For simplicity, interest is calculated monthly on each month’s balance. Many lenders accrue interest daily, which changes the totals slightly but not the comparison.

Dutch interest (on the full $300,000)

$300,000 × 11% ÷ 12 = $2,750 per month, every month. Over 6 months: $16,500.

Non-Dutch interest (on funds drawn)

• Month 1: $200,000 outstanding → $1,833.33
• Month 2: $225,000 → $2,062.50
• Month 3: $250,000 → $2,291.67
• Month 4: $275,000 → $2,520.83
• Month 5: $300,000 → $2,750.00
• Month 6: $300,000 → $2,750.00

Total: $14,208.33.

The Dutch structure costs $2,291.67 more at the same 11% rate. Put another way, the $16,500 of Dutch interest, measured against the money you actually had outstanding, works out to an effective rate of roughly 12.8% on funds drawn.

Where the extra cost comes from

The difference between Dutch and non-Dutch interest is exactly the interest on the undrawn balance. In the example above:

• Month 1: $100,000 undrawn
• Month 2: $75,000 undrawn
• Month 3: $50,000 undrawn
• Month 4: $25,000 undrawn
• Months 5–6: nothing undrawn

That is $250,000 of undrawn “balance-months.” At 11% a year, $250,000 × 11% ÷ 12 = $2,291.67, matching the difference above.

This gives you a useful rule of thumb: extra Dutch cost ≈ average undrawn balance × rate × months until fully drawn ÷ 12. Two things follow:

• The larger the holdback, the bigger the gap. A cosmetic flip with a small rehab budget barely notices Dutch interest. A heavy rehab or new build notices it a lot.
• The slower you draw, the bigger the gap. Once the loan is fully drawn, Dutch and non-Dutch cost the same per month. Permit delays, contractor problems and slow inspections all stretch the period when you are paying interest on money you don’t have.

Holding the property longer after the final draw doesn’t widen the gap. If the flip above sold at the end of month 4, the Dutch loan would cost $11,000 and the non-Dutch loan $8,708.33: the same $2,291.67 difference.

Worked example: ground-up construction

Construction loans usually have a much larger share of the loan held back, and they draw over a longer period, so Dutch interest matters more. A hypothetical build:

• Total loan: $600,000
• Funded at closing: $150,000 (toward land)
• Construction holdback: $450,000, drawn in nine $50,000 draws at the end of months 1 through 9
• Rate: 11% interest-only
• Term used: 12 months

Dutch interest

$600,000 × 11% = $66,000 over 12 months.

Non-Dutch interest

The outstanding balance climbs from $150,000 in month 1 by $50,000 a month to $600,000 in month 10, then stays there. The sum of the monthly balances is $4,950,000. At 11% ÷ 12, total interest is $45,375.

The difference is $20,625, and the effective rate on funds actually drawn under the Dutch structure is about 16%, against a quoted 11%. On a project with a thin margin, that can be the difference between a profitable build and a break-even one. The Census Bureau’s new residential construction data is a reminder that building a home takes many months from start to completion, which is exactly the period when the undrawn balance is large. Learn more about how these loans are structured on the ground-up construction loans page.

Comparing a Dutch quote with a non-Dutch quote

Suppose two lenders quote the $300,000 flip above:

• Lender A: 10.5%, Dutch interest. $300,000 × 10.5% ÷ 12 × 6 = $15,750.
• Lender B: 11.25%, interest on funds drawn. $1,550,000 of balance-months × 11.25% ÷ 12 = $14,531.25.

Lender B’s rate is 0.75 percentage points higher, yet its interest cost is about $1,200 lower on this draw schedule.

You can find the break-even rate by comparing balance-months. The Dutch loan charges interest on $1,800,000 of balance-months ($300,000 × 6); the non-Dutch loan on $1,550,000. A 10.5% Dutch rate is therefore roughly equivalent to 10.5% × 1,800,000 ÷ 1,550,000 ≈ 12.2% on a non-Dutch loan with this schedule. Any non-Dutch rate below about 12.2% is cheaper in interest.

Interest is only part of the cost. Origination points are usually charged on the full loan amount, including the holdback, regardless of how interest accrues, so a Dutch-versus-non-Dutch choice doesn’t change what you pay in points. Lenders also differ on underwriting, draw and inspection fees, and on whether those fees are paid at closing or deducted from each draw; see points and fees explained. The fair comparison is total cost over your expected hold. The Dutch interest calculator runs both structures on your own draw schedule.

How to spot Dutch interest in a term sheet

Because the label isn’t standard, read the language describing what interest is charged on. Phrases that often indicate Dutch interest:

• “Interest charged on the full loan amount”
• “Interest accrues on the total commitment” or “total loan amount”
• “Interest payable on the entire principal, including holdback”

Phrases that often indicate non-Dutch interest:

• “Interest on funds disbursed” or “on drawn funds”
• “Interest on the outstanding principal balance”
• “Non-Dutch interest”

If the term sheet is silent or vague, ask in writing: “Is interest calculated on the full loan amount or only on funds disbursed, and does that include the rehab holdback?” Then confirm the answer matches the promissory note at closing. The note controls, not the marketing material or a verbal answer.

Why there is no standard APR to compare

With a consumer mortgage, the annual percentage rate (APR) folds the interest rate and many fees into one comparable number. The CFPB explains the difference between an interest rate and an APR. But hard money loans for investment property are generally business-purpose loans, and Regulation Z under the Truth in Lending Act generally exempts credit extended primarily for business or commercial purposes; the CFPB publishes the text of that exemption at 12 CFR 1026.3.

The practical result is that lenders aren’t generally required to give you a standardized APR or Loan Estimate on these loans, and the quoted rate can hide very different costs depending on Dutch interest, points and fees. That’s why it helps to calculate total dollars over your own timeline instead of comparing headline rates. Hard Money Lender Match shows each anonymized lender’s rate, points, lender fees and estimated total cost over the hold period side by side, so differences like Dutch versus non-Dutch interest show up in the total rather than hiding behind the rate. You can try it in the comparison tool.

Related terms that affect your interest cost

• Minimum interest. Some lenders charge a minimum number of months of interest even if you repay early. Combined with Dutch interest, a quick flip can carry a larger interest bill than expected.
• Prepayment penalties. Less common on short-term hard money loans than on long-term rental loans, but worth checking.
• Interest reserves. Some construction loans set aside part of the loan to pay interest during the build. If interest is Dutch, the reserve needs to be larger, which can push you closer to the lender’s loan-to-cost limit.
• Per diem accrual. Many lenders calculate interest daily, often on a 360-day year. Ask which day count is used; it slightly changes the dollar amount.
• Extension fees. If the project runs past the loan term, extensions typically cost a fee, often a fraction of a point, plus continued interest.

Market rates move over time. The Federal Reserve publishes widely watched benchmark rates in its H.15 Selected Interest Rates release. Private lenders set their own pricing, but broader rate conditions affect their cost of capital and, over time, the rates they quote.