One of the more confusing parts of a bridging loan for first-time borrowers is how interest is actually charged. Unlike a mortgage, where you make a monthly payment throughout the term, most bridging loans handle interest differently, and the method used has a real impact on how much money you receive on day one, and how much you owe at the end.
What retained interest means
With retained interest, the total interest for the agreed term is calculated upfront and deducted from the loan before you receive it. If you borrow £100,000 over six months at a monthly rate of 1.75%, the interest for the full term, £10,500, is retained from the loan at the outset, along with any arrangement or broker fees. You receive the balance, and the full £100,000 plus interest is repaid at the end of the term. This is the model we use for our own bridging loans, and it's the most common approach across the bridging market.
What serviced interest means
With serviced interest, you pay the interest monthly throughout the term, similar to how a mortgage works, and repay only the original loan amount at the end. This means you receive more of the loan upfront, since interest isn't deducted in advance, but you need to be able to cover the monthly payments out of your own income or cash flow for the duration of the loan.
Why retained interest is the more common choice
Retained interest is popular for a simple reason: it removes the need to service monthly payments during the loan term, which suits situations where the property isn't generating income yet, such as a refurbishment project where you're not living in or renting out the property until the work is finished. It also simplifies affordability assessment, since there's no ongoing payment to check you can cover month to month.
How it affects the amount you actually receive
This is the detail that catches people out most often. If you're borrowing £100,000 and the retained interest and fees come to £14,000, you don't actually receive £100,000 into your account: you receive £86,000, with the full £100,000 (plus interest) due back at the end. This is why we built our calculator to show "Total Borrowed" and "Total Paid out" as two separate, clearly labelled figures, since assuming they're the same number is one of the most common sources of confusion when budgeting for a bridging loan.
Working out which suits your situation
Retained interest tends to suit situations where cash flow is tight during the loan term, such as a refurbishment where the property isn't earning any income until the work is complete, or an auction purchase where you need the maximum possible funds available on day one. Serviced interest can suit situations where you have reliable income to cover monthly payments and would rather receive a larger sum upfront, for example if the loan is funding a purchase where every available pound of the loan needs to go toward the price itself.
A worked comparison
On a £50,000 loan over six months at 2% per month, retained interest would deduct £6,000 upfront, leaving you £44,000 (before other fees) to use, with £56,000 due back at the end. Under a serviced structure at the same rate, you\'d receive close to the full £50,000 upfront, but would need to find £1,000 a month in interest payments across the term, with just the original £50,000 due at completion.
How this interacts with early repayment
With a retained interest loan, if you repay early, you've already paid interest for the full agreed term upfront. This is exactly why our early repayment terms reduce the overall cost by 5% for every month you repay ahead of schedule, effectively refunding a portion of interest you'd otherwise have paid for time you didn't actually use the loan.
Part-and-part arrangements
Some lenders, ourselves included on certain cases, can also offer a part-and-part structure, where a portion of the interest is serviced monthly and the remainder is retained. This can suit borrowers who have some income available during the loan term but not enough to cover the full monthly interest, giving a middle ground between the two main structures rather than an all-or-nothing choice.
What to check before you commit
Whichever structure you're offered, make sure you understand exactly what you'll receive on day one, and what you'll owe at the end, before signing anything. A good lender should set this out clearly in writing, alongside the rate and fees, rather than leaving you to work it out from a headline interest rate alone.
If you're weighing up retained versus serviced interest for your own situation, get in touch and we can talk through which structure fits best, or use the calculator on our home page to see exactly how the numbers work out on our retained-interest bridging loans.