Most new construction loans are structured as interest only during the build period. This means borrowers pay interest on the drawn loan balance rather than making full principal and interest payments. Understanding how this payment structure works helps investors accurately forecast carrying costs and manage cash flow throughout the project.
What Interest-Only Means #
With a standard amortizing loan, each payment covers both principal reduction and interest. With an interest-only structure, the monthly payment covers only the interest accrued on the current outstanding balance. As a result, the loan principal does not decrease during the build phase. The borrower repays the full balance at maturity through a sale or refinance.
How Interest Accrues on a Construction Loan #
Because construction loans release funds in draws rather than a lump sum, interest accrues only on the amount actually drawn. For example, if a borrower has a $600,000 loan but has drawn only $200,000, monthly interest applies to the $200,000 balance, not the full commitment. Consequently, carrying costs are lower early in the project and increase as more funds are drawn.
How to Calculate Monthly Payments #
To estimate a monthly interest payment, multiply the outstanding drawn balance by the annual interest rate, then divide by 12. For example:
- Outstanding draw balance: $300,000
- Annual interest rate: 12%
- Monthly payment: $300,000 x 0.12 / 12 = $3,000
This figure increases with each additional draw as more funds are disbursed. Therefore, projecting draw timing in advance helps estimate carrying costs at each stage of the project.
Why This Structure Benefits Investors #
Interest-only payments help investors manage cash flow during construction when the property is not yet generating income. Since the project is not yet complete or occupied, there is no rental revenue to offset carrying costs. By limiting monthly payments to interest only, lenders reduce the financial burden on borrowers during the most capital-intensive phase of the project.
AHL’s Interest-Only Term #
AHL structures new construction loans as interest-only with terms of 12 to 18 months. This gives investors sufficient time to complete the build and execute their exit strategy before the loan matures. Furthermore, investors pursuing a build-to-rent hold can ask about AHL’s one-time close option, which transitions the loan into permanent financing after construction without requiring a separate refinance.
Summary #
Interest-only payments on a construction loan mean borrowers pay only the interest on their drawn balance rather than reducing principal. Since funds are drawn in stages, monthly costs start low and increase as the project progresses. AHL offers 12 to 18 month interest-only terms, giving investors a manageable payment structure throughout the construction phase. Understanding how these payments work allows investors to budget accurately and avoid cash flow surprises during the build.