What is an interest reserve on a bridge loan?
An interest reserve is a portion of the bridge loan, typically six to twelve months of interest, that the lender holds back at closing and uses to make your monthly payments during the term. On a $600,000 loan at 10 percent, a six-month reserve is $30,000, and it is a cost you finance rather than a payment you skip.
How it works
At closing, the lender funds the full loan but holds back the reserve amount. Each month, the lender pays itself the interest due from that held-back balance. You do not write a check. When the reserve is exhausted, you start paying interest from your own cash unless the loan is paid off first.
Sizing the reserve
| Project | Typical reserve |
|---|---|
| Light renovation, 3 to 6 month plan | 6 months |
| Heavy renovation or lease-up, 6 to 12 month plan | 9 to 12 months |
| Ground-up construction | Full construction period plus 3 to 6 months of lease-up |
| Buy before selling | Expected overlap plus a 3 month cushion |
Lenders size it to the plan plus a cushion, and they may require a larger reserve when reserves in your accounts are thin.
What it costs
The reserve is part of the loan, so you pay interest on it, and it reduces the net proceeds available for the purchase or renovation. On a $600,000 loan at 10 percent with a $30,000 reserve, only $570,000 is available for the deal, and you pay interest on the full $600,000. The reserve is not extra cost beyond the interest itself; it is the interest, financed.
Why lenders like it
A funded reserve means the loan performs even if the project runs slow or rents come in late. That lowers the lender's risk and can improve your terms. Borrowers like it because it preserves working cash during the project.
When it runs out
If the project runs past the reserve, payments come from your pocket. A common surprise on construction loans is a six-month reserve on a nine-month build. Ask for a reserve that covers the realistic timeline plus a cushion, and keep three months of interest in your own accounts as a backstop.
Interest on drawn funds only
On construction and heavy-rehab bridge loans, interest accrues only on the funds drawn so far, which makes the early months cheaper and the reserve last longer than a flat calculation suggests.
How CommFi handles it
Our lending desk sizes the reserve to the plan and shows you the net proceeds after the holdback so there are no surprises. It funds direct when it fits, and when a lender with a different reserve policy is the better match, the desk searches a database of 7,000+ lenders and the ones that fit compete for the file. Zero upfront fees.
Related reading
Related questions
- Is an interest reserve free money?
- No. It is part of the loan, so you pay interest on it and it reduces the cash available for the project.
- How many months of interest reserve do lenders require?
- Six months is common for light projects, nine to twelve for heavy renovation or lease-up, and the full build period plus lease-up for construction.
- What happens when the interest reserve runs out?
- You make the interest payments from your own funds until the loan is paid off or extended.
- Can I skip the interest reserve and pay monthly instead?
- Some lenders allow it if your liquidity is strong. Many require the reserve as a condition of the loan.
- Do I pay interest on the reserve itself?
- Yes. The reserve is funded from loan proceeds, so it accrues interest like the rest of the balance.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.