Two lenders can quote you the same rate on a hard money loan — say, 12% — and you'll end up paying very different amounts in total interest over the life of the deal. The reason is a structural piece of how the loan is set up, and it's almost never explained up front. The piece is called Dutch interest. Here's what it means, how to figure out if your loan has it, and what to ask the lender on your next call.
Your hard money loan has two parts
A typical fix-and-flip or BRRRR loan from a hard money lender has two pieces. There's the money that wires to the title company at closing — your purchase money. And there's the money that's held back to fund renovation draws as you submit invoices through the rehab — your rehab money. The two together make up your total loan amount. The rehab portion sits with the lender until you pull against it.
On a $150,000 loan, that might look like $100,000 going out at closing and $50,000 held back. The exact split varies deal to deal.
Two ways the lender can calculate your interest
This is where it gets interesting. There are two common ways a lender can charge interest on a loan with a holdback, and the difference shows up in your total cost.
Disbursed-only. Interest is charged only on what has been disbursed at any given time. At closing, that's just the purchase portion ($100,000 in our example). As you pull draws against the rehab holdback, the interest-bearing balance steps up. If you draw the full holdback halfway through the loan, you spend the first half paying interest on a smaller balance and the second half paying on the full amount.
Dutch interest. Interest is charged on the full committed amount from the day the loan closes — including the rehab holdback that's still sitting with the lender. From day one, you're paying interest on the entire $150,000, regardless of how much has actually been disbursed.
Both structures are common in the market. Neither one is hidden in the loan documents, but most lenders don't volunteer which one they use unless you ask.
What it costs you in real dollars
Take the $150,000 loan at 12% for 5 months, with $50,000 of holdback drawn down in two pulls — $25,000 at month 1 and $25,000 at month 3.
Under Dutch interest: interest accrues at $50 a day on the full $150,000 from closing. Total interest over 150 days: $7,500.
Under disbursed-only: interest accrues at $33 a day on the first $100,000 for the first month, $42 a day on $125,000 for the next two months, and $50 a day on $150,000 for the last two months. Total interest over 150 days: roughly $6,000.
The Dutch structure costs you about $1,500 more in interest on this particular deal. On a smaller holdback or a faster draw, the gap shrinks. On a bigger holdback or a slower draw, it grows.
Why a lender would run Dutch
A Dutch lender isn't charging the extra interest for no reason. The structure comes with operational advantages that often matter more than the dollar difference, depending on what kind of project you're running.
- Speed at closing. Because the lender doesn't have to model an ongoing draw schedule into their yield math, the underwriting and closing process is simpler. Loans close faster.
- No per-draw approval friction. The rehab money is committed from day one. When you submit a draw, the lender is releasing money that's already been earmarked, not approving a new advance. That tends to be a faster process.
- Cleaner incentive alignment. A disbursed-only lender has an incentive to push you toward a draw schedule that maximizes their interest. A Dutch lender doesn't.
Those advantages aren't worth it on every deal, but for an operator who values speed and predictability, they often are. The math is a trade — interest dollars for operational certainty.
The question to ask any lender
When you're shopping a hard money loan, the rate sheet only tells you part of the story. Two lenders can quote you the same rate and produce different total costs depending on how they calculate interest on the holdback. The question to ask, in plain English:
"Is interest charged on the full loan amount from day one, or only on what's been disbursed?"
If they say "the full amount," you have a Dutch loan. If they say "what's been disbursed," you have a disbursed-only loan. Both can be fair structures, but they produce different total interest, and you should know which one you have before signing.
How HCF charges interest
We charge Dutch. We're upfront about it because the structure is the right trade for the operators we work with — flippers and BRRRR investors who need speed at closing and certainty that the rehab money is committed and ready to draw. The interest math is slightly higher than disbursed-only, and we don't hide that. We also don't make you find out from a spreadsheet six months in.
If you've got a deal you're trying to close and want to compare the structure honestly, the form on Discuss My Deal takes about a minute. We'll respond the same day and walk through the math on your specific deal.