Dutch interest is interest charged on the full loan commitment from the day of closing, including rehab holdback funds the borrower has not drawn. Non-Dutch interest is charged only on the funded balance. On a bridge loan with a large holdback, the two structures produce different costs at the same quoted rate.
Two term sheets can look identical where everyone reads them. Same coupon, same points, same term, same leverage. The difference is one line in the interest section, and on a value-add deal with a real rehab budget that line can be worth more than a full point of origination. This post prices the line, shows what happens to the price when the rehab runs late, and gives you the conversion to compare the two structures on numbers instead of labels.
What is Dutch interest on a bridge loan?
Dutch interest is interest charged on the entire loan commitment from closing, whether or not the funds have been disbursed. Non-Dutch interest, also called as-disbursed or stage-funded interest, is charged only on the outstanding funded balance, so the holdback costs nothing until it is drawn. Private lenders sometimes call the first structure full boat interest.
The vocabulary around the mechanic is worth one paragraph, because the mechanic hides in it. A rehab holdback is the portion of the loan commitment reserved at closing to reimburse renovation work as it is completed. A draw is a disbursement from that holdback, typically paid after an inspection confirms the work. Future funding is the institutional term for the same arrangement: committed loan dollars that fund after closing as the budget is spent. An unused fee, sometimes called a non-utilization fee, is a separate charge, usually a fraction of the coupon, applied to committed but undrawn dollars.
Here is the candid part. Dutch is private-lender vocabulary. Debt funds and banks rarely put the word in a document. Their notes say interest accrues on the outstanding principal balance, or on the loan amount, or they charge an unused fee on the unfunded commitment, which is the same economics at a smaller scale. The label is unreliable. The mechanic is not. Read for the mechanic.
Why does a lender charge interest on undrawn funds?
Because the commitment is real even when the wire has not gone out. A lender funding off a warehouse line, or out of a fund with its own cost of capital, is carrying the full commitment from the day it closes. The $800,000 sitting in the holdback cannot be lent to anyone else. Dutch interest is how some lenders get paid for that carry.
It is not a trick. It is a price. And it sometimes buys something: Dutch structures can come with a lower coupon or lower points, and a lender who is already earning on the holdback has no economic reason to slow-walk your draws. The question is never whether Dutch interest is bad. The question is what it costs on your draw schedule and what you are getting in exchange. So ask every bridge lender the question directly, before the term sheet is signed: is interest calculated on the funded balance or on the full commitment? The answer sorts term sheets faster than the coupon does.
How much does Dutch interest cost on a $3 million bridge loan?
On the schedule below, $30,000 in the first year, the equivalent of one additional origination point. Here is the trace.
Take a Northeast secondary-market value-add multifamily deal, dated September 2026. Total commitment $3,000,000. Funded at closing $2,200,000. Rehab holdback $800,000, which is 26.7% of the commitment. Twelve-month initial term, interest-only. Assume a 10.00% coupon. That coupon is an illustration, not a quote and not a market statistic; your term sheet sets the real number, and every dollar figure below scales linearly with the rate. Two simplifications, stated up front: interest is computed monthly on a 30/360 basis, and draws fund at month-end. Accrual conventions vary by lender, and an actual/360 basis, where used, raises every figure slightly without changing the comparison.
The rehab draws in eight equal draws of $100,000, funded at the end of months 1 through 8.
| Month | Undrawn during month | Funded balance during month |
|---|---|---|
| 1 | $800,000 | $2,200,000 |
| 2 | $700,000 | $2,300,000 |
| 3 | $600,000 | $2,400,000 |
| 4 | $500,000 | $2,500,000 |
| 5 | $400,000 | $2,600,000 |
| 6 | $300,000 | $2,700,000 |
| 7 | $200,000 | $2,800,000 |
| 8 | $100,000 | $2,900,000 |
| 9 to 12 | $0 | $3,000,000 |
Sum the undrawn column: $3,600,000 of monthly undrawn balances. Divide by 12 and you get $300,000 of undrawn dollar-years, which is the number that prices the whole comparison. Undrawn dollar-years is the sum of each month's undrawn holdback, divided by 12. The extra cost of Dutch interest equals the loan's annual rate multiplied by its undrawn dollar-years, so the borrower's draw schedule, not the quoted coupon, determines the cost.
Extra interest under Dutch = annual rate x undrawn dollar-years
Undrawn dollar-years = (sum of each month's undrawn holdback) / 12
Base case: 10.00% x $300,000 = $30,000
| Dutch | Non-Dutch | |
|---|---|---|
| Interest base | $3,000,000 for all 12 months | Funded balance each month |
| 12-month interest | $300,000 | $270,000 |
| Extra cost of Dutch | $30,000 | |
| Same cost in points on $3.0M | 1.00 point | |
| Effective coupon on money in use | 11.11% | 10.00% |
On a $3,000,000 value-add multifamily bridge loan with an $800,000 rehab holdback drawn evenly over eight months, Dutch interest at a 10.00% coupon costs $30,000 more than non-Dutch interest over the first year, the equivalent of one additional origination point. The formula makes the figure rate-proof: the extra cost is the rate times $300,000, so each 100 basis points of coupon adds $3,000. At 9.00% the premium is $27,000; at 11.00% it is $33,000.
The premium also has a cleaner expression than dollars. On that draw schedule a 10.00% Dutch coupon is equivalent to an 11.11% non-Dutch coupon, because the borrower pays interest on $3,000,000 while using an average of $2,700,000. One more property of the math worth knowing: the Dutch premium is set by the draw schedule, not the term, so the base case costs $30,000 extra whether the loan runs 12 months or 18, and only the effective-coupon figure dilutes with a longer term, to 10.71% over 18 months.
What happens to the cost when the rehab runs late?
The cost goes up, and only under Dutch. This is the reason the structure deserves more attention than it gets. Under non-Dutch interest, a permit delay costs you time. Under Dutch interest, it costs you time plus interest on $800,000 that is still sitting with the lender.
Run the same deal with one change: permits push the first draw back 90 days, so the same eight draws of $100,000 fund at the end of months 4 through 11. The holdback now sits untouched at $800,000 for four months, then steps down $100,000 a month. The undrawn column sums to $6,000,000, which is $500,000 of undrawn dollar-years. At 10.00%, the Dutch premium is $50,000. A 90-day permit delay on an $800,000 rehab holdback adds $20,000 of interest under a 10.00% Dutch structure and nothing under a non-Dutch structure. That $20,000 is just $800,000 at 10.00% for a quarter of a year, paid on money the sponsor never touched during those months.
Now connect that to how draws actually work. Draws reimburse completed work after inspection. You front the cost to the contractor, you wait for the inspector, then you wait for the wire. Every day of that friction is a paid day under Dutch interest. A slow rehab under Dutch interest is a rate increase the sponsor gives himself.
How do I compare a Dutch term sheet to a non-Dutch term sheet?
Convert the Dutch quote into the rate it charges on money you actually use: effective coupon equals the quoted rate times the full commitment divided by the average funded balance. Three steps, one spreadsheet column each. First, build the monthly draw schedule you actually believe, not the one in the pro forma. Second, average the twelve monthly funded balances. Third, gross up the Dutch coupon by the ratio of commitment to average funded balance.
On the base case that is 10.00% times $3,000,000 over $2,700,000, or 11.11%. So a non-Dutch quote up to about 110 basis points higher in rate is still the cheaper loan on this schedule. That is the whole comparison method, and it is worth doing every time, because the answer moves with the holdback's share of the loan. This deal holds back 26.7% of the commitment and the conversion adds 111 basis points. A loan with a 10% holdback barely cares. A loan with a 35% holdback cares a lot.
Whether the two sheets in front of you are one of each is deal-specific and market-specific, so treat the question as mandatory rather than assuming the structure from the lender type. The label will not be on the cover page either way.
Where is this in the loan documents?
In the note's interest accrual definition and in the future-funding or holdback section of the loan agreement. Interest computed on the outstanding principal balance is non-Dutch. Interest computed on the loan amount or the face amount is Dutch. Bank and debt-fund bridge documents rarely use the term Dutch interest; the mechanic appears in the note's interest accrual definition, as interest on the loan amount rather than the outstanding principal balance, or as an unused fee on the unfunded commitment.
While you are in the documents, read the draw mechanics beside the accrual language: any fee charged per draw, any inspection fee, any minimum draw size, and any minimum interest provision. An interest reserve is loan proceeds held back at closing to pay the loan's own interest during the term. Minimum interest is a floor on the total interest the lender collects regardless of how fast you repay. Both interact with the accrual base, which is what the questions below are for.
Before you sign the term sheet, ask:
- Is interest calculated on the funded balance or the full commitment?
- Is the interest reserve itself funded at closing, and does it accrue interest from day one?
- What is the draw turnaround from request to wire, and who orders the inspection?
- Is there a fee per draw, and a minimum draw amount?
- Does minimum interest run on the full commitment or the funded balance?
One of those questions deserves its own paragraph. If the loan holds back an interest reserve from proceeds and the structure is Dutch, you are paying interest on the reserve that exists to pay the interest. I am not going to put a number on that here, because the answer depends on how the reserve is structured. Ask the question and get the answer in writing.
The same funded-versus-full-balance question shows up on the hedging side of a floating-rate bridge loan, where the notional of the required rate cap can be set at either balance; we covered that cost in the replacement rate cap post. The fee side of a bridge extension has its own invoice, priced in the extension exit-rate post.
The counter-case: when Dutch interest is the right trade
Sometimes the Dutch sheet is the one to sign. Three cases come up.
First, a fast, front-loaded rehab. If 80% of the budget draws in the first 90 days, the undrawn dollar-years collapse and the premium shrinks toward a rounding error. The formula does not care about the label; it cares about how long the money sits.
Second, execution. A cheap non-Dutch loan from a lender with three-week draw turnarounds can cost more in contractor delay than it saves in interest, and a lender already earning on the full commitment has no incentive to ration your draws. The lender who actually closes, and actually funds draws on time, is worth real basis points. Interest reserve adequacy and draw discipline are the same conversation, one we have had before in the Newark bridge deal story and, on the construction side, in the ground-up financing post.
Third, price. Some Dutch structures carry a lower coupon or lower points precisely because the lender earns on the whole commitment. Run the conversion and let the numbers decide: an effective 11.11% against a non-Dutch quote of 11.50% is a win for the Dutch sheet, on the same schedule that made 10.00% Dutch more expensive than 10.75% non-Dutch.
The instruction that survives this post is short. Bring your draw schedule to the term-sheet comparison. Build it month by month, compute the undrawn dollar-years, and price every sheet on the effective coupon rather than the quoted one. The exit deserves the same arithmetic, and that math lives in the bridge-to-Conventional-Small takeout post.
FAQ
What is Dutch interest on a bridge loan? Dutch interest is interest charged on the full loan commitment from the day of closing, including rehab holdback funds the borrower has not yet drawn. The quoted coupon applies to the whole loan amount whether or not the money has left the lender's account. Private lenders sometimes call this full boat interest; the documents rarely use either name.
What is the difference between Dutch and non-Dutch interest? Dutch interest accrues on the full commitment from closing. Non-Dutch interest, also called as-disbursed or stage-funded interest, accrues only on the funded balance, so holdback dollars cost nothing until they are drawn. The quoted rate can be identical on both term sheets while the first-year cost differs by tens of thousands of dollars.
How much more does Dutch interest cost on a multifamily bridge loan? The extra cost equals the annual rate multiplied by the loan's undrawn dollar-years. On a $3,000,000 loan with an $800,000 holdback drawn evenly over eight months, that is $300,000 of undrawn dollar-years, so an illustrative 10.00% coupon produces $30,000 of additional first-year interest, about one origination point.
How do I compare a Dutch-interest term sheet to a non-Dutch term sheet? Convert the Dutch coupon to its effective rate on money actually in use: multiply the quoted rate by the full commitment divided by the average funded balance under your draw schedule. On the schedule in this post, 10.00% Dutch is equivalent to 11.11% non-Dutch, so a non-Dutch quote up to about 110 basis points higher is still the cheaper loan.
Why would a sponsor accept Dutch interest? Because the rest of the deal can more than pay for it. A lower coupon or fewer points can offset the holdback interest, a fast front-loaded rehab collapses the undrawn dollar-years, and a lender who funds draws in days instead of weeks can be worth more than the interest difference. Run the numbers on your own schedule.
Where do the loan documents say whether interest is Dutch or non-Dutch? In the note's interest accrual definition and in the loan agreement's future-funding or holdback section. Interest computed on the outstanding principal balance is non-Dutch; interest on the loan amount or face amount is Dutch. The word Dutch rarely appears. Look for the mechanic, and for any unused fee on the unfunded commitment.