What is construction loan interest in property financing?

Construction loan interest is charged while a property project is financed progressively, before the construction loan is fully consolidated into a mortgage. In principle, it is calculated only on the funds already drawn, not on the entire approved credit limit.

Key point: in Swiss construction financing, the decisive factor is not only the advertised rate but the combination of the drawdown schedule, the actual debit balance, fees, the duration of the building work and the consolidation date.

Construction loan interest: a precise definition in the Swiss context

The term construction loan interest refers to the financing cost incurred between the first drawdown for the building work and the final establishment of the mortgage financing. In Swiss banking practice, you are more likely to encounter the terms “construction loan interest”, “debit interest on the construction account” or “costs of the construction phase”.

An interim loan is not a uniformly defined banking product in Switzerland. It should not be confused with a bridging loan, which is mainly intended to cover the timing gap between buying a new property and selling an existing home.

Interest starts to accrue as soon as the construction account has a debit balance or a mortgage tranche is paid out. Subject to the contractual terms, it stops on the consolidated portion once that amount is converted into a mortgage. Consolidation may take place in full at the end of the building work or partially as the project progresses. The latter option allows the amounts already drawn to be converted progressively into mortgage tranches.

It is also necessary to distinguish construction-phase costs in the broader sense from interest alone. The total cost of the construction phase may include:

• debit interest on the amount actually drawn;
• a credit fee calculated in accordance with the contract;
• construction account and payment-processing fees;
• the cost of arranging or reserving the mortgage financing.

Comparing only the nominal rate therefore gives an incomplete picture. Some offers apply a quarterly fee, in addition to the variable rate, calculated on the highest debit balance. The calculation basis and all other charges must be checked in each offer.

Why construction loan interest arises during a building project

A house is not paid for in a single instalment. Architects, contractors and tradespeople invoice according to the progress of the work. The construction account brings together the equity, loan drawdowns and project-related payments. The bank generally settles approved invoices, or debits them after review, to ensure that the financing is used for its intended purpose.

The process usually involves four stages:

1. You contribute the equity specified in the financing plan.
2. The construction loan is drawn according to the invoices and the actual progress of the work.
3. The debit balance increases as funds are paid out.
4. The amount drawn is consolidated into a mortgage, either in full or in tranches.

Some banks require the equity to be used before the bank loan. Where this sequence applies, construction loan interest does not start when the account is opened, but only once the equity has been exhausted and the loan actually shows a debit balance.

The duration of the building work directly affects the cost. A delayed project prolongs the interim financing even though the amount drawn is often already high. The property owner may also have to pay the current rent, construction loan interest, storage expenses and other delay-related costs at the same time.

A budget overrun affects two factors at once: it increases the amount financed and may extend the building schedule. A financial reserve is therefore not used only to pay for unforeseen work; it also reduces the risk of having to increase the debt when construction loan interest is at its highest.

How to calculate construction loan interest for property financing

The correct calculation is not obtained by multiplying the total loan amount by the annual rate and the duration of the project. This method often overstates the interest because the full financing is not used from the first day.

The basic formula is:

Interest for a period = debit balance × annual rate × number of days ÷ annual basis

The annual basis may be 360 or 365 days, depending on the contract and the bank’s calculation method. To obtain the total, add the interest for each period during which the balance remains unchanged.

The actual cost depends on the amount and date of each drawdown, the rate applied, the contractual calculation method and any fees added to the interest.

The construction loans generally have a variable rate, which may therefore change during the building work. They are also often slightly more expensive than a standard mortgage, in return for their flexibility and the fact that interest is charged only on the amount actually drawn.

Example 1: construction loan interest when building a house

You have a credit limit of CHF 700’000.–. The building work lasts twelve months and, in this purely illustrative example, the annual rate remains at 3%. The drawdowns result in the following balances:

• CHF 120’000.– for 90 days;
• CHF 300’000.– for 92 days;
• CHF 550’000.– for 92 days;
• CHF 700’000.– for 91 days.

Using a 365-day basis, the interest is calculated as follows:

• CHF 120’000.– × 3% × 90 ÷ 365 = approximately CHF 888.–;
• CHF 300’000.– × 3% × 92 ÷ 365 = approximately CHF 2’268.–;
• CHF 550’000.– × 3% × 92 ÷ 365 = approximately CHF 4’159.–;
• CHF 700’000.– × 3% × 91 ÷ 365 = approximately CHF 5’236.–.

Total construction loan interest is approximately CHF 12’551.–.

If the contract also provides for a quarterly fee of 0.25% on the highest debit balance in each quarter, the fee in this example would be approximately CHF 4’175.–. The interim financing cost would then reach approximately CHF 16’726.–, before any account and administration fees.

This example shows why two offers with similar rates can produce different costs. A fee calculated on the quarterly maximum is particularly expensive when a large drawdown is made shortly before the end of a quarter.

Example 2: the cost of a three-month delay

Assume that a building project is delayed by 92 days when the average debit balance has already reached CHF 500’000.–. With an illustrative annual rate of 3.2%, the additional interest cost is:

CHF 500’000.– × 3.2% × 92 ÷ 365 = approximately CHF 4’033.–.

This amount does not include the credit fee, the extended rent or additional construction costs. An administrative or technical delay may therefore have a financial impact considerably greater than the interest alone.

Use our mortgage calculator to simulate your property financing.

Construction loan interest and buying off-plan: who actually finances the build?

When buying off-plan, you should not automatically assume that you will pay construction loan interest. Everything depends on the contractual structure.

Case 1: the general contractor finances the construction and you draw your mortgage only when ownership is transferred or the property is handed over. In this scenario, the contractor’s financing cost is generally included in the sale price. You may not receive a separate invoice for construction loan interest, but that does not mean the financing is free.

Case 2: you make successive instalment payments according to a payment schedule, and your bank releases tranches progressively. You then pay interest on the amounts actually disbursed before handover. The construction contract should link payments to verifiable building stages, specify how price changes are handled and define the consequences of a delay.

Case 3: the mortgage is paid out in fixed tranches. You pay interest as soon as each tranche is made available. This arrangement provides greater predictability but less flexibility if the building schedule changes.

Before signing, request a schedule showing the dates and amounts of the instalments, their financing source, when interest starts, the consequences of a delay and the consolidation terms. Without this breakdown, a “fixed price” may conceal financing costs that have already been included.

Tax treatment of construction loan interest in Switzerland

The tax treatment requires particular attention because construction loan interest is not always treated in the same way as ordinary mortgage interest.

For direct federal tax purposes, interest on construction loans is generally treated as investment expenditure and is not deductible from income during the construction phase.

Cantonal practice is not uniform. Some cantons treat this interest as investment expenditure that increases the property’s acquisition cost, while others allow it to be deducted for cantonal and municipal taxes under certain conditions.

You should therefore not automatically copy the bank certificate figures as though they were ordinary mortgage interest. Identify the construction period, the date when the property became available and the portion incurred after consolidation. Where the interest is treated as investment expenditure, it may also form part of the tax acquisition cost used for a future sale; keep all statements and supporting documents.

The tax treatment depends on the canton where the property is located, the type of property, whether it is allocated to private or business assets and the precise financing phase. Before claiming any deduction, obtain confirmation from a fiduciary or the cantonal tax authority.

How to reduce construction-phase costs without disrupting the project

Reducing construction loan interest does not mean artificially delaying every payment. A late payment may stop the building work, trigger penalties or damage the relationship with contractors. The objective is to align cash outflows with the actual progress of the project.

1. Request a detailed drawdown schedule. Each tranche should correspond to an identifiable stage: land purchase, excavation, structural work, weatherproofing, technical installations, interior finishing and handover. A payment schedule that is too heavily concentrated at the beginning unnecessarily increases the debit balance.

2. Compare the total cost, not only the rate. Ask each lender for a simulation using the same drawdown schedule. Require the rate, fee, account charges, administration costs and consolidation terms to be shown separately.

3. Assess partial consolidation. It may reduce the cost, but a fixed-rate tranche arranged too early becomes restrictive if the building work is delayed or the final amount changes.

4. Check the basis used to calculate fees. A fee based on the highest debit balance in the quarter does not produce the same result as a fee based on the average balance or the approved limit. This contractual item may amount to several thousand francs.

5. Budget for the double financial burden. Your budget assessment should include your current rent, construction loan interest, insurance, construction costs, unfunded expenditure and an allowance for delays. A long-term mortgage affordability calculation is not a substitute for a monthly cash-flow plan during the building work.

6. Regulate delays contractually and retain a reserve. The contract should specify the deadlines, payments and financial consequences of a delay. Do not use all your liquidity as equity if this leaves no margin for unfunded expenditure.

Mistakes that distort a construction budget

The most common mistakes are calculating interest on the final amount for the entire period, confusing the approved limit with the balance actually drawn and assuming that all bank interest is tax-deductible.

It is equally risky to consider the financing separately from the construction contract. A design change may shift the timing of an invoice, increase the debit balance and delay consolidation.

Finally, the bank approves a limit based on a budget and a property valuation. If the costs exceed the agreed budget or the recognised final value is insufficient, additional equity may be required.

Prepare a budget assessment before signing

A robust assessment should reconstruct the financing month by month. It should include at least the land cost, building work, professional fees, taxes, utility connections, insurance, construction loan interest, fees, non-financeable expenditure and a reserve.

Then request three scenarios:

• a base scenario based on the contractor’s schedule;
• a scenario with a delay of three to six months;
• a scenario involving a budget overrun and a rise in the variable rate.

This approach shows not only whether the bank is likely to accept the application, but also whether you can finance the building phase without exhausting your liquidity. A discussion with a mortgage financing specialist also allows you to compare a construction loan, mortgage payments in tranches and partial consolidation on a genuinely consistent basis.

Before committing, have the full cost of the construction phase calculated by a mortgage expert in your region. A simulation based on your payment dates and actual budget is more useful than an isolated indicative rate.

Disclaimer: this content provides general information about property financing in Switzerland. It does not constitute tax or legal advice or a credit offer. Banking and tax conditions depend on your circumstances, the canton and the relevant contract.