Whatever you pay him is the price for the house, it doesn't matter how he calculates it. It's not tax deductible to you because it is not a mortgage in your name that you are obligated to pay. Whatever you pay for the house is your cost basis, and paying a higher cost will reduce your taxable capital gains when you sell. But this is not a tax deduction for you.
And he does get to deduct it as business expense, because he is paying for it.
Think about a new car. The sticker price is $35,000 and the dealer will sell it to you for $33,000. What you don't know, because it happens behind the curtain, is that the dealer paid the factory $30,000 for the car, but the dealer borrowed the money and is paying $300 per month interest to the bank until they sell the car. That's why dealers are often ready to make a deal at the end of the month (before the next interest payment) and why they often make better deals on cars that have been sitting on the lot a long time (because the interest is adding up). But you don't pay $30,000 for the car plus $900 for interest plus $2100 dealer profit, you just pay $33,000 and that's your cost.
So with your house, you are buying a house for an agreed price. It makes no difference to you how much the builder paid for wood, cement, nails, shingles, pipes, wires, or labor. It also makes no difference to you how much money the builder borrowed or what his interest rate was. Normally, you never even see those details, you just agree on a price. Here, the builder seems to have found a tactic to persuade you to pay a higher price. But it doesn't matter what the tactic was, all that matters is that you will pay some agreed on final price for the house and that is your price. You are not the loan borrower, and you are not the owner of the property at the time the interest is being paid, so this is not a deductible expense for you. It's just part of the overall price of the house and it doesn't matter how that price was added up.
