Source: breakdown by Ian Duffy (@scrubs2estates)
On a construction loan, one phrase in the terms can change how much interest you pay. With a Dutch loan, you pay interest on the full loan amount from day one. With a non-Dutch loan, you pay interest only on the money you have actually drawn. Ian Duffy, a developer, says that one phrase can save more than six figures in interest on a construction loan.
The short answer
On a construction loan, one phrase in the terms can change how much interest you pay. With a Dutch loan, you pay interest on the full loan amount from day one. With a non-Dutch loan, you pay interest only on the money you have actually drawn. Ian Duffy, a developer, says that one phrase can save more than six figures in interest on a construction loan.
Dutch vs. non-Dutch, as Ian defines them
Ian uses a $3 million construction loan as his example.
- Dutch loan: You pay interest on the entire $3 million from day one, even if you have not used it yet.
- Non-Dutch loan: You pay interest only on what you actually use.
His analogy is a credit card. If you have a $3 million limit and have only drawn $500,000, you only pay interest on the $500,000. When you draw another half million, you start paying interest on that too.
Why it matters on a construction project
Construction money is not used all at once. It is pulled in stages as the building goes up. Ian's examples are the foundation, then framing, then mechanical, electrical and plumbing (MEP), then finishes. Each stage is a draw. For how draws work, see What Is a Construction Loan Draw?.
His point: if the money has not been touched yet, why pay interest on it? His summary: with Dutch, you pay on the whole loan. With non-Dutch, you pay as you draw.
How it adds up
Illustrative arithmetic with hypothetical numbers. Not from the reel. Assume a $3,000,000 loan at 10% annual interest, an 18-month build, and draws that rise evenly from zero to the full amount, so the average balance is about half of the loan.
| Balance charged interest | Interest over 18 months | |
|---|---|---|
| Dutch loan | $3,000,000 for all 18 months | $450,000 |
| Non-Dutch loan | About $1,500,000 on average | $225,000 |
| Difference | $225,000 |
Real numbers depend on the rate, the schedule and how fast funds are drawn. The gap is largest when a project draws slowly, and it shrinks if most funds are drawn early.
What to ask your lender
General education, not from the reel. Terms vary by lender.
- How is interest calculated? On the full commitment or only on the outstanding balance?
- How is interest paid? Monthly out of pocket, or from an interest reserve built into the loan?
- Are there minimum interest or other fees? Some loans carry minimums or fees that change the real cost.
- What does the loan document actually say? Do not rely on a verbal summary. Have an attorney or experienced advisor review the language before you sign.
Frequently Asked Questions
- What is a Dutch construction loan?
- A loan where interest is calculated on the full loan amount from day one, regardless of how much has been drawn.
- What is a non-Dutch construction loan?
- A loan where interest is charged only on the amount actually drawn.
- Why does non-Dutch save money?
- Because early in a project, little of the loan has been drawn, so you pay interest on a smaller balance for longer.
- How much can it save?
- Ian says over six figures on a $3 million loan. The actual amount depends on the rate, the build schedule and the draw timing.
- Is non-Dutch always better?
- It generally costs less in interest, but other loan terms, such as the rate and fees, can offset the difference. Compare the total cost of each loan.
This article is for general education only and reflects the author's views and experience. It is not legal, tax, lending or investment advice. Loan terms, rates and fees vary by lender. Consult a qualified professional before taking on a construction loan.
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