At a site visit last year, a developer proudly told me his loan came with a twenty four month moratorium. His exact words were, for two years the loan costs me nothing. He was mid-way through pricing his units, and that assumption was baked into his margin.
I asked him one question. When you draw the first tranche next month, what happens to the interest on it?
The pause that followed is the reason for this article. The moratorium is one of the most misunderstood features in construction finance, and the misunderstanding is expensive precisely because it feels like good news. Let me demystify it properly, because the concept is genuinely simple once someone lays it out.
What does a moratorium actually defer?
Repayment. Not interest.
A moratorium, sometimes called a principal holiday, means the lender does not expect EMIs during the construction period. It exists for a sound reason. A project under construction has money going out and little coming in, so full repayment from month one would break the cash flow of even a healthy project.
But interest begins accruing on every rupee from the day it is disbursed. What varies between loan structures is what happens to that interest, and this is the detail worth reading your term sheet for:
- Serviced monthly. You pay the interest every month during construction. Repayment of principal waits, but you have a real monthly outflow from day one, growing with each tranche drawn.
- Capitalised. You pay nothing during the moratorium, and the interest is added to your loan balance. You then pay interest on that interest for the rest of the tenure.
Neither structure is free. One costs cash flow now, the other costs more money later. The right choice depends on your collections curve, which is a structuring conversation, not a rate conversation. This is a good example of why I keep saying the interest rate should be the last number you negotiate, not the first.
How much does interest during construction actually amount to?
Lenders have a name for this cost, IDC, interest during construction. It sits as a line item in every properly prepared project cost statement, and its size surprises most first-time developers.
Take a real-shaped example. A 40 crore construction loan at 12 percent, drawn in tranches over 24 months, roughly in line with construction progress. Because draw-downs are staggered, you are not paying 12 percent on 40 crores from day one. But by the second year most of the loan is out, and the arithmetic lands at roughly 5 to 6 crores of interest accrued before your first EMI. That is 13 to 15 percent of the loan amount, existing as a cost before you repay a single rupee of principal.
If that number is in your project cost from the beginning, it is just a cost. If it is not, it comes out of your margin, and you discover it at the worst possible time, near the end of the project when flexibility is lowest.
What does a six month delay do to the numbers?
This is where the moratorium mindset does real damage. A developer who believes the loan costs nothing during construction treats a delay as a scheduling problem. A developer who knows the meter is running treats it as a financial event, because it is.
In the late stages of a project, most tranches are drawn, so the accrual is at its maximum. On that same 40 crore loan, a month of delay near the end adds roughly 35 to 40 lakhs of interest. Six months adds over 2 crores. And if your moratorium expires before the delayed project starts collecting properly, you are now paying full EMIs from a project that is not yet generating the cash to pay them. That mismatch, more than the delay itself, is what turns late projects into stressed ones. It is also why the draw-down planning I described in the article on how disbursements actually work matters so much. Tranche timing and interest cost are the same subject.
I will admit that early in my career I also treated IDC as a footnote, a percentage someone else had estimated. The first time I built the month-by-month accrual for a client's delayed project and watched the balance grow in the final stretch, it permanently changed how I read term sheets. The developers I now consider the most financially disciplined all share this habit. They know their accrued interest figure at any point in the project, the way they know their sales numbers.
How do you model this before you sign?
You do not need a banker or a spreadsheet marathon. You need fifteen minutes and honest assumptions.
Take your realistic construction timeline, not the optimistic one. Take the lender's draw-down stages. Apply the rate to each tranche for the months it will be outstanding before repayment begins. Then do it again with a six month delay, because some version of a delay is the base case in this industry, not the exception.
We built our construction loan EMI and interest calculator to do exactly this. It models the moratorium period separately from the repayment period, so you can see the interest accumulating during construction and what your EMI becomes afterwards. Run your own project through it with a delay scenario, and you will know your exposure better than most borrowers a lender meets.
What should you do this week?
One action. Find the IDC number for your current or next project. If it is in your project cost statement, check the assumptions behind it against your real construction timeline. If it is not there at all, calculate it this week, because it exists whether or not it is written down.
And if you are comparing term sheets and the moratorium structures differ, do not let anyone reduce that comparison to the interest rate. Structure decides what the money costs. If you want help reading a specific structure, that conversation is exactly what we are here for.