Navigating construction financing in a higher interest economy
How to secure funding for your build amid elevated interest rates
If you’re thinking about breaking ground but hit a bump in the road with your lender’s quote, it’s a sign of the times. With interest rates lingering at recent highs and tighter lender terms, getting your project off the ground takes more financial finesse than it did just a few years ago.
For developers, business owners, and property investors alike, this environment can be challenging — but not impossible — and projects are moving forward. But success in today’s market requires more creativity, more planning, and more strategy than ever before.
Where rates stand in mid-2025
Following several aggressive Fed rate hikes beginning in 2022, the construction financing picture has changed in just a few short years:
- Short-term construction loan rates generally fall in the 6%–9% range, depending on the lender and loan type.
- Bridge or mezzanine loans may be higher, in the 8% to 9% range (sometimes higher).
- SBA 504 loan rates, a popular option for commercial projects, currently range from 6.17%–6.39%, with up to 90% financing available.
- 30-year fixed mortgage rates are hovering around 6.6%–6.8.
Strategies to build smart in a higher-interest environment
So what can you do when interest rates are working against you? Plenty. Below are several proven strategies to navigate higher borrowing costs and keep your project on track:
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Lock in fixed rates or use ARMs strategically.
If you’re financing now, look for fixed-rate construction-to-permanent loans to lock in predictable costs. For shorter timelines, adjustable-rate mortgages can offer lower initial rates, which is helpful if you plan to refinance once rates drop.
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Plan for take-out financing.
One way to reduce long-term interest costs is to refinance your construction loan into a lower-rate permanent loan once the build is complete. Having a take-out strategy helps you avoid being stuck with high rates for longer than necessary.
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Diversify your funding sources.
Consider a mix of financing tools to improve cash flow and limit exposure to rate swings:
- SBA 504 loans offer long terms and competitive fixed rates.
- Private equity or mezzanine financing can bridge capital gaps.
- Seller financing or owner-carry options may be viable in some deals.
Blending traditional and alternative funding sources can improve cash flow and reduce your exposure to short-term rate volatility.
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Consider bridge or gap financing.
If your project is viable but hindered by timing or capital constraints, a bridge loan may be a helpful solution. These loans often come with higher interest but can allow construction to proceed while you finalize permanent financing or raise equity.
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Trim costs with a design-build team.
The less you borrow, the less interest you pay — and that makes upfront cost-saving strategies especially valuable. A design-build firm will commit design, estimating, and project management professionals to collaborate with each other, and the owner, to balance design, functionality, budget and schedule needs to find a successful pathway forward for your project. Working with an experienced design-build team to trim costs by 5–10% can help offset the impact of today’s higher interest rates.
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Use rate locks and float-down clauses.
Some lenders offer rate lock or float-down options. These let you cap your rate now but still take advantage of a lower one later if rates fall — providing both cost control and peace of mind.
Move forward despite rate pressure
Higher interest rates are here for the time being. But that doesn’t mean your project has to wait. By taking a proactive, strategic approach to construction financing, you can:
- Reduce your cost of borrowing.
- Improve lender confidence.
- Protect your cash flow.
- Build now to prevent future cost increases due to year-over-year inflation.
Planning a project? Contact DBS Group to explore integrated design solutions that can help you move forward with confidence — and without unnecessary cost.