For property developers, the headline rate on a development loan is only part of the story. How interest is structured can have a much bigger impact on capital, cashflow, risk and returns.
For SME and first-time property developers in particular, misunderstandings around interest structure can create unnecessary financial pressure. In this guide we explain the main types of interest used in development finance, and the financial impact of each.
How does interest work in property development finance?
Development finance works differently from standard residential or buy-to-let lending. Rather than paying interest in a simple monthly repayment, interest is usually structured around the build programme and exit strategy.
Interest may be added to the loan, held back by the lender, paid monthly, or split across more than one approach. Each structure shifts cashflow and risk in different ways, which is why choosing the right option matters as much as agreeing the rate.
The key question for developers is not just how much interest they will pay, but when they pay it and how that affects working capital during the project.
What is rolled interest?
Rolled interest is calculated during the loan term but not paid monthly. Instead, it is added to the loan balance and settled when the loan is repaid, usually from sale or refinance proceeds.
Because interest is not deducted from the loan at the outset, rolled interest can improve your day-one equity position. More of the facility is available to fund the acquisition, meaning you may need to inject less equity on day one compared with retained interest structures. It also preserves cashflow during the build by removing the need for monthly interest payments, which can be particularly helpful on schemes with no income until completion.
The key consideration with rolled interest is timing. Interest is settled at the end of the loan rather than during the project, so if the programme extends, the total interest payable increases. As with any development finance structure, delays will increase overall interest cost, which makes realistic timelines and contingency planning important.
What is retained interest?
Retained interest involves the lender setting aside some of the loan at the outset to cover interest for a defined period. That interest is pre-funded and applied according to the loan terms, rather than being paid monthly by you during the retained period.
This approach gives the lender certainty that interest is covered and removes the need for you to service interest monthly early in the project. It can be useful where early-stage cashflow is tight or where greater certainty around payment risk is required.
The trade-off is reduced net loan proceeds at the start of the project. Because interest is deducted from the facility up front, retained interest can increase the amount of equity you need to contribute on day one and reduce initial working capital. As with other structures, retained interest does not remove sensitivity to programme delays and should be modelled carefully alongside build costs and contingency.
What is serviced interest?
Serviced interest is paid regularly, usually monthly, from your own cashflow rather than being added to the loan balance.
This structure can reduce the final repayment amount and gives you visibility over interest costs as the project progresses. It can work well where your scheme generates income during the loan term, or where you have strong external cashflow to support regular payments.
However, serviced interest increases cashflow pressure during construction. Even though interest is paid as it accrues, delays still result in higher overall interest because payments continue for longer. You therefore need confidence in ongoing cash availability and realistic assumptions around programme and exit.
What is hybrid interest?
Hybrid interest combines elements of retained, rolled and sometimes serviced interest. A common structure in development finance is to retain interest at the outset, then roll interest on development drawdowns as the project progresses.
This approach aims to balance day-one certainty with longer-term cashflow flexibility. It can work well where your early cash demands are high but the project profile changes as construction advances.
Hybrid structures require careful alignment with your programme and exit strategy. While they can offer a practical middle ground, they are more complex than single-method structures and should be assessed with a clear understanding of how interest will behave if timelines shift.
How do interest structures affect cashflow and returns?
Interest structure affects how much cash a developer needs to inject during the project and how resilient the scheme is to delays or cost changes. Different approaches shift the balance between cashflow flexibility, overall cost and risk exposure.
Rolled interest protects cashflow by removing the need for monthly payments, but increases exposure to programme overruns as interest accrues over time. Serviced interest can reduce the total cost of finance, but requires confidence in ongoing cash availability throughout the build. Retained interest improves certainty for the lender, but reduces initial liquidity and can increase the equity required at the outset.
There is no single best structure for all developers or schemes. Sales-led projects often favour rolled or hybrid structures, while refinance-led schemes may support servicing once income is established. In practice, the lowest apparent cost option is not always the most appropriate. Preserving working capital and contingency often matters more than marginal differences in interest cost, especially on complex or first-time projects.
What mistakes can developers make with interest structures?
A common mistake developers make is choosing a loan based on the headline rate without fully understanding how interest will be applied in practice. Others optimistically assume projects will complete exactly on time, leaving no margin for delays, cost overruns or changes in market conditions.
Some developers overestimate future sales or rental income and commit to servicing interest too early, before cashflow is secure. Others underestimate how retained interest can reduce the net funds available at the start of a project, increasing the equity required to complete the acquisition.
Stress-testing different scenarios early is critical. Modelling delays, softer exit values or slower sales helps developers choose interest structures that remain workable under pressure and keeps options open if circumstances change mid-project.
How do lenders assess and structure interest on development loans?
Lenders consider several factors when offering interest structures, including developer experience, asset type, planning status, build complexity and the proposed exit strategy. These inputs help lenders assess both delivery risk and cashflow resilience over the life of the loan.
Not all interest structures are available on all deals. Higher-risk schemes, early-stage developments or projects with uncertain programmes may require retained or rolled interest to reduce payment risk. Lower-risk or income-producing projects, where cashflow is more predictable, may support serviced interest or hybrid structures.
Clear alignment between programme, cashflow and exit gives lenders confidence. Where assumptions are well evidenced and risks are understood, lenders are more likely to offer flexible terms that support delivery rather than constrain it.
How does CrowdProperty structure development finance interest?
At CrowdProperty, we offer flexibility across rolled, retained and hybrid interest structures, depending on the needs of the scheme and the developer. Our aim is to align the interest structure with the realities of the programme, cashflow profile and exit strategy.
Rolled interest is now standard on our non-exceptional development loans. Interest is fully rolled for the term of the loan, meaning only fees are typically deducted at the outset. This allows developers to retain more capital from day one, reduces the equity required to complete the acquisition, and creates a stronger starting position during the early stages of construction when cash demands are highest.
Where a scheme’s cashflow, income profile or risk position supports an alternative approach, we can still structure retained or hybrid interest solutions. The focus is always on ensuring the interest structure supports delivery and exit, rather than creating unnecessary pressure mid-project.
Other articles you may find interesting
How SME property developers can secure residential development finance
10 mistakes property developers make and how to avoid them
Property conversions – a guide to planning, risk and funding for SME developers
Ready to discuss your next project?
At CrowdProperty, we support developers and brokers with expert-led development finance designed around real-world delivery.
If you’re a developer looking for funding, call 0203 012 0166 or email our Direct Team.
If you’re a broker looking to work with us, call 0204 525 2251 or email our Broker Team.
We’re property finance by property people. Together we build.