On a rehab loan, interest is charged one of two ways. Under a Dutch structure, sometimes called full boat, you pay interest on the entire loan amount from the day you close, including renovation money still sitting with the lender. Under a non-Dutch structure, sometimes called interest on drawn funds, you pay interest only on the money that has actually been advanced to you. Same rate, same loan amount, different bill. On a typical six month flip the gap is often one to two thousand dollars, and on a larger or slower project it can be several times that.
Neither structure is a trick. Both are common, and both are legitimate as long as they are disclosed. The problem is that two term sheets with the same rate can cost different amounts, and most borrowers compare the rate and stop. Here is how each one works, with the math, and how to tell which one you are being offered.
Why the question exists at all
A fix and flip loan is really two pieces of money under one note.
- The initial advance goes to the closing table and helps you buy the property.
- The rehab holdback is the renovation budget. The lender commits to it at closing but holds it back and releases it in draws as work is completed and inspected.
So on day one, you have signed for the full loan amount but only received part of it. The interest structure answers a simple question: do you pay for the part you have not received yet?
Dutch interest, also called full boat
With Dutch interest, the lender charges interest on the total committed loan from the closing date. Your payment is the same every month, whether you have drawn all of the rehab funds or none of them.
Lenders who use it have reasons. The full amount is reserved for you from the day of closing, and that capital cannot be lent to anyone else. Many lenders fund the entire loan into a servicing account at closing, so their own cost of money starts on the whole balance right away. A level payment is also simple to service and simple for a borrower to budget.
Non-Dutch interest, also called interest on drawn funds
With non-Dutch interest, the lender charges interest only on the outstanding balance, meaning the initial advance plus whatever draws have been released so far. Your payment starts lower and rises each time a draw funds.
This structure tracks the money you are actually using. It rewards a borrower who has not started work yet, and it softens the cost of delays early in a project. The payment changes month to month, so your carrying cost budget has to account for a moving number.
The same loan, both ways
Take a project with a $200,000 purchase and a $60,000 renovation. Total cost is $260,000. At 90 percent loan to cost, the loan is $234,000: a $174,000 initial advance and the $60,000 rehab budget held back. Use a 10.9 percent interest only rate for illustration. This is example math, not a quote.
Dutch. Interest is charged on $234,000 from day one. That is $2,125.50 every month. Over six months, $12,753.
Non-Dutch. Assume you take four draws of $15,000 each, funded at the end of months one through four.
- Month 1, balance $174,000: $1,580.50
- Month 2, balance $189,000: $1,716.75
- Month 3, balance $204,000: $1,853.00
- Month 4, balance $219,000: $1,989.25
- Months 5 and 6, balance $234,000: $2,125.50 each
Total over six months: $11,390.50. The difference is $1,362.50 on a clean project that draws on schedule.
Three things make that difference bigger.
- A larger rehab budget relative to the purchase. The holdback is the only part of the loan the two structures treat differently. A heavy renovation with a $150,000 budget has far more undrawn money sitting idle than a cosmetic job.
- A slow start. Permits, contractor scheduling, or a seller holdover can leave a project at zero draws for two months. Under Dutch interest you pay on the full budget that whole time. In the example above, every month with nothing drawn costs $545 in interest on money you have not touched.
- Drawing late. Many investors float materials and labor themselves and request draws in a few large pieces near the end. Under a non-Dutch structure that habit lowers interest cost. Under Dutch it makes no difference to interest at all.
Turning the difference into a rate
The useful way to compare two offers is to convert them to the same terms. In the example, the Dutch loan at 10.9 percent cost $12,753 over six months. The non-Dutch loan would have to carry a rate of about 12.2 percent to cost the same, given that draw schedule. Put the other way, a Dutch loan at 10.9 percent and a non-Dutch loan at 11.9 percent are closer than they look, and the non-Dutch loan is still slightly cheaper on this project.
That is why rate alone is a poor way to choose a lender. A full comparison has to include points, fees, and the interest structure together. We go through the points side of that in points or rate on a six month flip.
Where to find it on a term sheet
The words Dutch and non-Dutch almost never appear in the documents. Look for the sentence that describes what interest accrues on. It will read something like one of these.
- "Interest shall accrue on the full principal amount of the loan from the closing date." That is Dutch.
- "Interest shall accrue on the outstanding principal balance" or "on funds disbursed." That is non-Dutch.
Then check the stated monthly payment. If the term sheet shows one fixed payment and that payment equals the full loan amount times the rate divided by twelve, it is Dutch. If it shows an initial payment based on the day one advance, it is non-Dutch.
If the document is unclear, ask in writing: "Is interest charged on the full loan amount or only on drawn funds?" A lender with nothing to hide answers that in one line. Our guide to reading a hard money term sheet line by line covers the other items worth checking in the same pass.
Related terms that change the real cost
The interest structure sits next to a few other terms that affect what you actually pay.
- Draw fees and inspection fees. Each draw usually involves an inspection, and many lenders charge for it. On a non-Dutch loan, taking many small draws keeps interest low but stacks up fees. Fewer, larger draws usually balance the two.
- Draw turnaround. How many days pass between your request and money in your account? Slow draws force you to float contractors with your own cash, which is a cost even though it never shows up as interest.
- Interest reserves. Some loans build several months of payments into the loan itself. That helps cash flow, and it also means you are borrowing your own interest payments.
- Minimum interest. Some loans guarantee the lender a minimum number of months of interest even if you pay off sooner. That is separate from a prepayment penalty, and it matters on a fast flip.
- Day count. Interest calculated on a 360 day year costs slightly more than on a 365 day year. It is small, and it is one more reason to compare totals instead of rates.
Which structure is better for you
It depends on the project in front of you.
Dutch interest costs you least when the rehab budget is small compared to the purchase price, work starts the week you close, and you draw quickly. On a light cosmetic flip the difference can be a few hundred dollars, and a lower rate or lower points from the Dutch lender may more than make up for it.
Non-Dutch interest matters most when the renovation is heavy, the timeline is long, permits will delay the start, or you typically fund work yourself and draw late. On those projects the structure is worth real money, and it is worth paying a slightly higher rate to get it.
The only reliable method is to model your own project both ways. Lay out your realistic draw schedule month by month, including the slow start you hope will not happen, and total the interest under each offer. Then add points and fees. The cheapest loan is the one with the lowest total for your timeline, and it is not always the one with the lowest rate.
Put it in your holding cost budget
Whichever structure you have, interest is only one line in what a flip costs each month. Taxes, insurance, utilities, and lawn care run the whole time, and they do not care how your interest is calculated. Build the full monthly number before you make an offer. Our article on what holding a flip costs every month walks through each line.
Our rehab loan program is interest only, with draws released as renovation milestones are completed and no prepayment penalty. When you request a term sheet, ask us how interest is calculated on the holdback and what the payment will be in month one. You should have that answer, from any lender, before you sign anything.