Default interest is a higher rate of interest charged by a lender when a borrower fails to meet agreed obligations under a property development finance agreement, such as late repayment or breach of covenants. It serves both as compensation for the increased risk and as a deterrent against non-performance. The default interest rate is typically set out in the loan documentation and is enforceable under UK law if it is not deemed penal or excessive. This financial remedy helps lenders protect capital and manage risk exposure in development lending.
In practice, default interest becomes relevant when a development loan falls into arrears or a borrower breaches agreed obligations, increasing the lender’s risk profile and prompting enhanced monitoring of the facility. As part of the broader framework of Litigation, Disputes, and Enforcement, it provides a contractual mechanism for compensating lenders during periods of non-compliance while encouraging prompt remedial action. It is closely related to Default Rate, which refers to the specific increased rate applied following a default event. Default interest provisions are also commonly encountered in Capped Return Debt structures, where preserving expected lender returns remains a key commercial consideration.
View glossary entry