Capitalised interest on a development loan: tracking it against the forecast

Consider a $2.4 million build, drawn in six equal claims at 9% a year, repaid when the last sale settles three months after completion. It capitalises $119,718 of interest where every claim lands on the 1st. Paid on the 15th, it capitalises $111,084. Paid on the 28th, $103,067.

A feasibility using the common rule of thumb, that half the loan is outstanding on average, allowed $108,000 in all three cases. The rule of thumb cannot see when money goes out or how long it stays out, and those two things decide the figure. That is why capitalised interest needs a month by month record.

Why capitalised interest drifts from the forecast

Three differences separate the feasibility from the loan statement. None of them is a mistake in the lender's calculation.

1. Interest on interest. Interest joins the balance, usually monthly, and next month's interest runs on the larger balance. An average balance multiplied by a rate misses that entirely.
2. When the money leaves. A contract drawing heavily early, or claims paid early in each month, keeps more of the loan outstanding for longer.
3. The months after completion. The balance is at its peak and still growing until settlements repay it.

Set up the tracking sheet

One row per month, with columns matching the lender's statement, lets the two compare line by line:

• opening balance
• each draw, with the date it was paid
• interest charged, exactly as the statement shows it
• fees added to the loan
• closing balance
• forecast closing balance, from the feasibility
• the difference between the last two

The difference column deserves a read every month. A difference that grows each month is a trend, and it will not correct itself before practical completion.

The example, month by month

The same $2.4 million at 9% a year, starting in January. Interest runs daily on the balance and joins the loan on the 1st of each month. A draw of $400,000 lands on the 1st of each of the first six months:

• Month 1: $400,000 drawn, $3,057.53 interest, balance $403,057.53
• Month 2: $400,000 drawn, $5,544.40 interest, balance $808,601.93
• Month 3: $400,000 drawn, $9,238.35 interest, balance $1,217,840.29
• Month 4: $400,000 drawn, $11,967.59 interest, balance $1,629,807.87
• Month 5: $400,000 drawn, $15,515.52 interest, balance $2,045,323.39
• Month 6: $400,000 drawn, $18,088.69 interest, balance $2,463,412.08
• Month 7: nothing drawn, $18,829.92 interest, balance $2,482,242.00
• Month 8: nothing drawn, $18,973.85 interest, balance $2,501,215.85
• Month 9: nothing drawn, $18,502.14 interest, balance $2,519,717.99

Month 2 is February, which is why its interest looks low. From month 7 nothing is drawn, yet each month still adds more than $18,000, charged on a balance that now includes its own interest. The three months after completion cost $56,306, close to the $63,412 of the whole six month build.

Where the numbers drift

Each case below uses the same loan, rate and daily calculation. Claims land on the 1st, with three months of settlements, unless a case says otherwise.

A front loaded contract

The same $2.4 million draws as $800,000, $800,000, $400,000, $200,000, $100,000 and $100,000. Total interest rises from $119,718 to $142,152, with nothing else changed.

A build that runs two months late

Spread the draws across eight months at $300,000 each. Total interest reaches $138,937.

Sales that settle late

The six month build stays, and settlements take five months rather than three. Total interest reaches $157,760, more than either case above, because every extra month runs on the peak balance.

Contingency paying the interest

When interest runs over, covering it from contingency is the easy fix. The project then has one buffer where the feasibility assumed two, and the next cost overrun has nothing behind it.

When the difference keeps growing

Re-forecast the remaining months from the actual balance and the dates claims are really being paid, not the original draw schedule. Compare that total with what is left in the facility's interest allowance.

If it will run short, talk to the lender while the allowance still has money in it. A variation requested early is a conversation about the project. The same request after a refused drawdown becomes a conversation about whether the project can finish.