Interest reserve
An interest reserve is part of a loan set aside at closing to pay the loan’s own interest for a set period, usually while a property is renovated or built and earns no income. Payments come from the reserve, not the borrower.
How an interest reserve works
The lender sizes the reserve from the loan amount, the rate and the expected time to finish the project, and holds it as an undisbursed part of the loan. Each month the servicer draws the interest due from the reserve. On construction loans, interest is often calculated only on the amount drawn so far, so the reserve has to model how the balance grows as draws are funded.
When the reserve runs out, the borrower starts paying interest from its own funds. Some loans require the borrower to top up the reserve if the project runs late.
Federal bank guidelines expect lenders to set standards and limits for interest reserves on development and construction loans.
Why it matters to a private lender
A reserve makes payments predictable while a project earns nothing, but it can hide trouble: a loan stays current from its own proceeds even when the work has stalled. Lenders manage this by tying the reserve to inspections and the draw schedule, checking that the project is on track before each month’s interest is drawn, and sizing the reserve for realistic, not best-case, timelines.
Capital partners will ask how reserves are sized and monitored, and loan tapes often show reserve balances.
Example
Hypothetical. A $600,000 loan at 12% interest-only with a 6-month interest reserve needs about $36,000 ($6,000 a month) set aside if fully funded at closing. If the work runs three months late, the borrower pays the last $18,000 itself.
Where Lender Capital fits
Lender Capital places first-lien, business-purpose real estate loans with capital partners. You apply once, then submit each loan with the full file. We send it only to capital partners whose criteria it fits, one partner funds the whole loan at closing and it is assigned to them. You keep your points (less the placement fee), earn the spread above the partner’s rate and service the loan. You pay a placement fee only when a loan funds.
Lender Capital is a business-to-business platform. This page is general information, not legal, tax or securities advice. Terms of warehouse lines and other funding sources vary by provider; confirm them with each provider and your counsel.