A capitalised loan is one where interest charges are added to the loan principal rather than being paid periodically. Over time, this increases the outstanding balance, with repayment typically made in full at maturity. This structure is common in property development finance UK, especially where early cash flow constraints make interest servicing impractical. It suits developers with a defined exit or refinance strategy, though it raises the total repayment due. Capitalised interest arrangements often accompany bridging, mezzanine, or hybrid loans.
In structuring terms, a capitalised loan typically sits within or alongside Payment in Kind (PIK) Debt, reflecting its shared characteristic of deferring cash interest payments in favour of compounding the balance. It is often compared with Rolled-Up Interest, although the precise mechanics and documentation can differ depending on lender requirements and deal complexity. From a legal and security perspective, obligations under a capitalised structure are usually captured within Secured Liabilities, ensuring lender protection as the debt accrues. Developers and funders will also model downside scenarios using tools such as an Interest Rate Sensitivity Stress Test to understand how compounding impacts total repayment under varying conditions.
View glossary entry