Capitalised interest is reserved inside the loan and repaid at the end from sales. Serviced interest is paid monthly from your own equity while the project runs. That single choice changes how much of your facility is left for actual construction, how high your peak debt climbs, how much cash you need on hand during the build, and what the loan costs you by the time you settle the last lot. It is one of the most consequential lines in a development feasibility, and it is also one of the most misread.
This guide is written for the property developer working out which structure their deal can carry. The mechanics are not state-specific, so the framing here applies across Australia and New Zealand (NZ), with the tax treatment grounded in current primary sources. The aim is simple: by the end you should be able to look at a term sheet, see whether the lender is capitalising or servicing the interest, and know exactly what that does to your drawdown, your equity, and your margin.
What is the difference between capitalised and serviced interest?
The difference is who holds the interest during the build and when it gets paid. With capitalised interest, the lender sets aside part of the facility limit to cover interest as it accrues, adds that interest to the loan balance each month, and collects the whole lot, principal plus accrued interest, when the project sells or refinances. You make no monthly interest payment. With serviced interest, you pay the interest periodically, usually monthly, out of your own cash or equity, and the loan balance only ever reflects the principal you have drawn for the project.
Put another way, capitalised interest is funded by the loan itself, and serviced interest is funded by you. Everything else that matters, available drawdown, peak debt, total cost, and the equity you need at each point in the program, flows from that distinction.
Lenders and feasibility models use two labels for this. A capitalised facility is often called a provisioned facility, because interest is reserved inside it as an interest provision that reduces what you can draw. A serviced facility has its interest paid from equity, outside the facility, so the full limit stays available to draw. The labels matter because they tell you where the interest sits in your cashflow, and that is the whole question.
How does capitalised (provisioned) interest work?
Capitalised interest works by reserving a slice of your facility limit for interest, then letting that interest accrue onto the balance instead of you paying it. The lender estimates the interest the facility will rack up over the term, holds that amount back as an interest provision, and lends you only the remainder for project costs. As the build proceeds, interest is charged each period and added to the outstanding balance. Because the next period’s interest is then calculated on a balance that already includes last period’s interest, capitalised interest compounds.
For most short-term development and construction facilities in Australia, capitalising is the default. The reason is structural: a development site produces no income while it is under construction, so there is generally no cashflow to service interest from until the lots settle. Lenders price and size the facility on the assumption that interest will roll up and be repaid out of Gross Realisation Value (GRV) at the back end. The Australian Securities and Investments Commission (ASIC) noted in its September 2025 review of private credit in Australia that capitalised, interest-reserve structures are characteristic of the non-bank construction and bridging lending that now funds a large share of mid-market development.
A worked feel for the numbers helps. Take a senior facility with a $10,000,000 limit, a term of 18 months, and an interest rate of 9.0% per annum (illustrative, not a quote). Lenders rarely assume the facility sits fully drawn the whole term, because drawdowns build up as construction progresses. A common convention, and a typical estimation assumption in feasibility models, is that around 55% of the facility is outstanding on average across the term. On that basis the estimated interest provision is roughly $10,000,000 x 9.0% x 18/12 x 0.55, or about $742,500. That $742,500 is carved out of the $10,000,000 limit and held as the interest provision. You can see how the choice to capitalise has already shrunk what is left for bricks and mortar before a single trade is on site.
How does serviced interest work?
Serviced interest works by you paying the interest as it falls due, monthly or quarterly, from equity or other income, so it never joins the loan balance. The full facility limit stays available for project costs because nothing is reserved for an interest provision. In exchange, you carry a real cash obligation every month the facility is live, and you have to fund it from somewhere other than the loan.
Using the same $10,000,000 facility at 9.0% per annum over 18 months, a monthly serviced estimate on the 55%-outstanding convention is about $10,000,000 x 9.0% / 12 x 0.55, or roughly $41,250 a month. Over the 18-month term that is about $742,500 in total, the same ballpark as the capitalised provision above, but with a crucial difference in where it lands: you pay it out of pocket as you go, rather than borrowing it. The loan balance you repay at the end is the principal only.
Serviced structures show up most often on facilities where there is income to service from, or where the lender wants the discipline of monthly payments. Residual stock loans against completed, unsold dwellings, land bank facilities, and some investment or build-to-hold positions are commonly serviced because the borrower has rent, other project cashflow, or balance-sheet capacity to meet the payments. One practical modelling note worth carrying: because serviced interest is paid down each period and never compounds, the total interest on a serviced facility tends to be a little lower than on an otherwise identical capitalised one. Funded fees behave differently too. On a serviced facility, a fee drawn on day one stays outstanding for the whole term, so interest accrues on it, whereas a capitalised structure folds fees into the provision logic.
What does capitalised interest do to your available drawdown?
Capitalising interest reduces the money you can actually draw for the project, because the interest provision comes out of the same facility limit. This is the point developers most often miss when they compare a capitalised and a serviced quote at the same headline limit. The two are not equivalent. At a $10,000,000 limit, a serviced facility leaves close to the full $10,000,000 available for project costs, while a capitalised facility at the same limit leaves only about $9,257,500 once the ~$742,500 interest provision is reserved (before any funded fees, which reduce it further).
Available drawdown is the number that actually funds your build, not the facility limit on the front page of the term sheet. On a capitalised source, available drawdown is the facility amount less funded fees less the interest provision (plus any credits); on a serviced source it is the facility amount less funded fees, with no interest deduction. The gap between the two is the interest provision, and it is real money you either fund with extra equity or borrow by sizing up the facility.
That has a direct feasibility consequence. If your project costs to fund are $10,000,000 and you choose a capitalised facility capped at a $10,000,000 limit, you are roughly $742,500 short and must plug the gap with additional equity. If instead you size the facility up so that available drawdown covers the full $10,000,000 of costs, the limit has to rise to roughly $10,800,000, and that bigger limit then has to fit inside your Loan to Value Ratio (LVR) and Loan to Cost Ratio (LTC) ceilings. Capitalised interest, in other words, quietly competes with your construction budget for headroom under the same gearing limits, a tension covered in more depth in the Loan to Cost Ratio (LTC) guide and the Loan to Value Ratio (LVR) guide.
How much more does capitalised interest actually cost?
Capitalised interest costs more than serviced interest because it compounds: you pay interest on interest that has already been added to the balance, whereas serviced interest is cleared each period and never accumulates. The size of the premium depends on the rate, the term, and how the facility draws down, but the direction is always the same.
To size the compounding effect, take the extreme case of a $10,000,000 balance held for the full 18 months at 9.0% per annum. Simple interest, the serviced-style figure where you pay as you go, is $10,000,000 x 9.0% x 1.5, or $1,350,000. Compounded monthly at 0.75% a month over 18 periods, the capitalised figure is about $1,439,000. The difference, roughly $89,000, is the cost of letting interest sit on interest. In a real development the facility is not fully drawn for the whole term, so the compounding premium is smaller than that worst case, but it is never zero and it grows with both the rate and the term.
Two things follow for your feasibility. First, a long program is where capitalised interest hurts most, because compounding has more periods to work and the provision keeps climbing. A six-month overrun on a capitalised facility does not just add six months of interest, it adds interest on a balance that already carries the accrued interest. Second, the realised cost can run ahead of the estimate. The 55%-outstanding convention is a planning assumption; if your draws come earlier or your settlements come later than modelled, the actual capitalised interest will be higher. A good model recalculates the actual interest accrued against your real draw schedule rather than leaving you on the flat estimate, which matters when you are stress-testing a deal that is already tight. Because funding interest feeds straight into your bottom line, it belongs in Total Development Cost (TDC), not treated as an afterthought.
The same deal, two ways: a worked $AUD example
Run one deal through both structures and the trade-off becomes concrete. Assume project costs to fund of $10,000,000, an 18-month term, and a senior rate of 9.0% per annum (illustrative). Hold fees aside to keep the comparison clean.
Under the capitalised structure, the facility has to be sized up so that available drawdown still covers the $10,000,000 of project costs after the interest provision is reserved. On the 55%-outstanding convention that means a limit of roughly $10,800,000, with about $800,000 held back as the interest provision. You pay nothing monthly. Your peak debt climbs to about $10,800,000 as interest accrues onto the balance, and the whole amount is repaid from settlement proceeds at the back end. The cash you need during the build is your equity towards the project costs, with no separate interest cash to find. The capitalised interest here runs a little higher than the serviced figure below, because you are borrowing the interest too, so it accrues interest of its own.
Under the serviced structure, the facility is sized to about $10,000,000, because no provision is reserved, so the full limit funds the project. Your peak debt stays close to $10,000,000 of principal, because interest never joins the balance. But you must find roughly $41,250 a month, about $742,500 across the term, in interest from equity or other income. That is real cash leaving your account every month the facility is live, and if the project earns nothing during construction, it comes straight out of your pocket.
The headline interest is similar in both cases, but almost everything else differs. Capitalised gives you a higher peak debt, a larger repayment at settlement, a touch more total cost from compounding, and no monthly cash strain. Serviced gives you a lower peak debt, full use of the facility limit for the project, slightly lower total interest, but a monthly cash demand you have to be sure you can meet. Your peak debt position is worth modelling carefully in its own right, which is the subject of the peak debt and funding exposure guide. Neither structure is universally better. The right one depends on how much cash you can spare during the build and how much headroom you have under your gearing limits.
What happens to capitalised interest if the project runs late?
A delay hurts a capitalised facility more than a serviced one, because every extra month adds interest to a balance that already carries accrued interest, and it does so at the most expensive end of the term when the facility is closest to fully drawn. If your 18-month program slips to 21 months, you are not simply adding three months of interest, you are adding interest on a balance that has been building the whole way through, and you may trigger an extension or rollover fee on top. On the worked example above, three extra months at 9.0% per annum on a roughly $10,800,000 balance could add in the order of $240,000 before any extension fee, and that lands straight on your peak debt and your end repayment.
Two practical consequences follow. First, the interest provision a lender reserves at the start is sized to the planned term, so an overrun can exhaust the provision and force you to either fund the shortfall from equity or ask the lender to increase the facility, which then has to fit back inside your Loan to Value Ratio (LVR) and Loan to Cost Ratio (LTC) limits. Second, a serviced facility gives you a clearer running signal, because you feel the cost every month rather than meeting it in one lump at settlement. Either way, the case for a generous contingency on the program, not just on the build cost, is strongest on a capitalised facility. Stress-testing the term, not only the rate, is where this risk shows up in a feasibility, so it is worth modelling a delayed-settlement scenario before you commit.
When do lenders capitalise, and when do they let you service the interest?
Lenders capitalise interest when the asset produces no income during the loan term, and they offer serviced interest when there is cashflow to pay from or they want monthly servicing discipline. For ground-up construction and most short-term development facilities, capitalising is close to standard, precisely because a building site earns nothing until it settles. For residual stock loans, land holding facilities, and build-to-hold positions, serviced interest is more common, because there is rent, sales income, or balance-sheet capacity behind it.
The lender type matters as much as the asset. Major banks and other authorised deposit-taking institutions operate under the prudential standards of the Australian Prudential Regulation Authority (APRA), including the credit risk standard Prudential Standard APS 220, and tend to apply tighter serviceability and pre-sale conditions. Non-bank and private credit lenders, which the Australian Securities and Investments Commission (ASIC) describes as a fast-growing part of the market in its private credit review, more often run capitalised, interest-reserve facilities priced for the back-end repayment. If you are weighing lenders, a development finance broker can tell you which structures a given funder will actually write for your asset class.
What is the interest cover ratio, and when does it bite?
The Interest Cover Ratio (ICR) measures how comfortably an asset’s income covers its interest bill, and it only constrains you on a serviced facility, because a capitalised facility has no monthly interest to cover during the build. It is calculated as net operating income divided by interest expense. Commercial lenders have historically looked for an Interest Cover Ratio (ICR) above 2.0 times for investment loans, though the threshold flexes deal by deal, and some lenders accept 1.75 times or lower for strong sponsors. On a serviced residual stock or investment facility, the rent or income has to clear the lender’s Interest Cover Ratio (ICR) hurdle before they will lend, and a thin Interest Cover Ratio (ICR) can cap your facility size regardless of the value of the asset. On a capitalised construction facility, the Interest Cover Ratio (ICR) is largely beside the point during the build, and the lender leans instead on the Loan to Value Ratio (LVR), the Loan to Cost Ratio (LTC), pre-sale cover, and the strength of the exit.
Is capitalised interest tax deductible the same as serviced interest?
Generally yes, the deductibility of interest does not turn on whether you capitalise or service it; it turns on what the borrowed money is used for. Interest on funds borrowed to carry on a property development business, or a profit-making undertaking on revenue account, is ordinarily deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). The High Court in Steele v Deputy Commissioner of Taxation [1999] HCA 7 confirmed that interest is ordinarily a recurrent, revenue-account expense that secures the use of borrowed money over the term of the loan, and that it can be deductible even where the income it relates to is expected only well into the future. The Australian Taxation Office (ATO) set out how it applies that reasoning in Taxation Ruling (TR) 2004/4, which deals with interest incurred before income-earning activity begins, and in the broader Taxation Ruling (TR) 95/25 on interest deductibility generally. Where the finished dwellings are held as trading stock under section 70-10 of that Act, the interest is generally still deducted as it is incurred rather than folded into the cost of the stock, though the treatment of holding costs can be intricate and is worth confirming with your own adviser.
Where the difference can show up is timing, not entitlement. Interest is deductible when it is incurred, and capitalised interest is generally incurred as it accrues onto the loan balance, not only when it is finally paid at settlement. So a developer on revenue account may be claiming deductions for capitalised interest across the years of the build, even though no cash interest has changed hands yet. Serviced interest is incurred and paid in the same period, which lines the deduction up with the cash outflow. The compounding feature of capitalised interest, interest charged on accrued interest, does not generally break deductibility, provided the underlying borrowing keeps its income-producing purpose.
Two cautions are worth flagging, and both point to getting your own tax advice rather than relying on a rule of thumb. First, if you are building to hold rather than to sell, the project may sit on capital account, and the interest and holding-cost treatment can differ from a trading-stock build; the Division 43 depreciation guide for build-to-hold developers covers where that line falls, and the capital gains tax guide covers the revenue-versus-capital question that sits underneath it. Second, the Australian Taxation Office (ATO) has sharpened its focus on related-party development structures, including arrangements where interest is charged between associated entities, in draft Practical Compliance Guideline (PCG) 2026/D2. If your capitalised interest is being charged by a related lender, expect the deduction and its timing to attract scrutiny, and price that risk in.
Does interest carry Goods and Services Tax (GST)?
No. Interest, whether capitalised or serviced, is consideration for a financial supply and is input-taxed, so there is no Goods and Services Tax (GST) on it and no Goods and Services Tax (GST) credit to claim. The Australian Taxation Office (ATO) treats lending money and providing credit for a fee as financial supplies, and financial supplies are input-taxed sales that carry no Goods and Services Tax (GST) in their price.
For your feasibility, that means the interest line, on either structure, sits outside the Goods and Services Tax (GST) calculation entirely. You do not gross it up, and interest is one of the few development cost lines that yields no Goods and Services Tax (GST) credit, because the finance you are buying is itself an input-taxed financial supply, a quirk of how Goods and Services Tax (GST) flows through development funding. There is a narrow wrinkle worth knowing: borrowing-related acquisitions can sometimes attract a Reduced Input Tax Credit (RITC) under the financial supply rules, one of the limited exceptions the Australian Taxation Office (ATO) allows, but that applies to certain costs of arranging the borrowing, not to the interest itself. Treat any Reduced Input Tax Credit (RITC) question as one for your accountant on the specific fee, not a reason to change how you model the interest.
How does this work for New Zealand developers?
The capitalised-versus-serviced choice works the same way mechanically in New Zealand (NZ) as in Australia: capitalised interest rolls up inside the facility and is repaid at the end, serviced interest is paid as you go from equity or income. New Zealand (NZ) development and construction lending leans heavily on capitalised interest for the same reason it does in Australia, because a site under construction generates no income to service from.
On tax, New Zealand (NZ) developers are generally well placed. Interest on borrowings for a land-dealing, development, subdivision, or building business is deductible under the land business exemption to the residential interest limitation rules, and a separate development exemption can apply to interest relating to creating a new build, as Inland Revenue sets out in its guidance on exemptions for property development and new builds. The development exemption generally runs from when you start developing the land until you sell it or are issued a Code Compliance Certificate (CCC). The wider picture has also shifted in developers’ favour: Inland Revenue’s property interest rules confirm that interest deductibility for residential property was restored to 100% from 1 April 2025, removing the phase-down that had complicated the position for several years. As in Australia, deductibility depends on the use of the funds and your own circumstances, so confirm the position with a New Zealand (NZ) tax adviser before relying on it.
Does the treatment vary by state or territory?
No. Whether interest is capitalised or serviced is set by your loan agreement and your lender, not by planning or revenue rules, so it does not vary across New South Wales (NSW), Victoria (VIC), Queensland (QLD), South Australia (SA), Western Australia (WA), Tasmania (TAS), the Australian Capital Territory (ACT), or the Northern Territory (NT). The tax deductibility of the interest is governed by Commonwealth law through the Income Tax Assessment Act 1997 (ITAA 1997) and the Australian Taxation Office (ATO), and the Goods and Services Tax (GST) treatment is likewise national, so neither changes from one state or territory to another.
What does vary by location is the lending market around the interest, not the interest mechanics themselves. Appetite, pricing, and pre-sale requirements differ between capital cities and regional markets, and the Reserve Bank of Australia (RBA) lenders’ interest rate statistics and the Australian Bureau of Statistics (ABS) lending indicators are the places to check where rates and credit conditions sit when you are pricing a deal. The structure question, capitalise or service, is the same wherever the site is.
How do you model capitalised versus serviced interest in a feasibility?
You model the choice by setting the interest treatment on each debt source and reading the effect through available drawdown, peak debt, and total funding cost, rather than just the headline rate. The three numbers that move are the money left for the project, the highest debt balance you reach, and the cash you need during the build. A serviced facility frees up the full limit for project costs but adds a monthly cash line. A capitalised facility removes the monthly cash line but reserves part of the limit and pushes up peak debt. A sound feasibility shows you all three under each structure, rather than the interest total alone.
In Feasly you can set a debt source to capitalised or serviced and see the difference flow through to available drawdown, peak debt, and total funding cost across the funding stack, and you can duplicate a scenario to put the two structures side by side on the same deal. Tying the interest treatment back to your monthly position is the job of a proper development cashflow model, where the timing of every draw and payment actually shows up.
So which should you choose?
Choose capitalised interest when the project earns nothing during the build and you would rather protect your cash and repay everything from sales, and choose serviced interest when you have the cashflow to pay monthly, want a lower peak debt, and want the full facility limit working on the project. Most ground-up developments default to capitalised for the simple reason that there is no income to service from until the lots settle. Serviced interest tends to suit residual stock, land holdings, and build-to-hold positions where rent or other income can carry the monthly bill.
The deeper point is that the two structures are not interchangeable at the same facility limit, and treating them as if they were is where feasibilities go wrong. Capitalised interest reserves part of your limit, compounds, and lifts your peak debt and your end repayment. Serviced interest leaves the full limit for the project and keeps the total cost a touch lower, but only if you can genuinely find the monthly payments without straining the rest of the program. Model both, read them through available drawdown, peak debt, and margin, and let the deal in front of you, not a default, decide which one you write.
This guide is general information for property developers and does not account for your specific circumstances. Interest rates, lending conditions, and tax positions change, and the deductibility of interest depends on facts particular to your project, so confirm the current position with your lender, your finance broker, and a qualified tax adviser before you rely on it.