Retained vs rolled vs serviced interest

Three ways to pay bridging interest

• Retained: the lender works out the interest for the whole term and holds it back from the loan on day one. Nothing to pay monthly. Because the interest sits inside the loan, it is charged on the gross loan, interest included.
• Rolled up: interest is added to the loan each month and repaid at the end with the loan. Nothing to pay monthly, and you only pay for the months you use. Usually compounds monthly; some lenders charge simple interest.
• Serviced: you pay the interest each month from your own cash, like an interest-only mortgage. The loan stays smallest, but the lender will check you can afford the payments.

Why the headline rate isn't the true rate

A retained loan is bigger than the cash you receive. To put £300,000 in your hand for 12 months at 0.75% a month with a 2% fee, the gross loan is £337,079, against £306,122 for a rolled or serviced loan. Interest and the fee are charged on that bigger figure, so 0.75% a month retained is really 0.84% a month on the cash you get. It also uses more of the lender's maximum loan to value, which can limit how much you can borrow.

At the same rate, retained always costs more. At 0.95% a month for 12 months, retained costs £46,420 against £42,903 rolled up, about £3,518 more for the same cash. That is why lenders often price retained interest lower.

Is a retained rate 0.20% lower always cheaper?

Not always. It depends on when you repay and what happens to the unused interest. Example: £300,000 of day-one cash, 12-month facility, 2% fee, retained at 0.75% vs rolled or serviced at 0.95% a month. Cost is interest plus the arrangement fee:

What the figures show:

• Use the full 12 months: retained at 0.20% lower is the cheapest here, by about £5,824 against rolled up.
• Repay early, unused interest refunded: retained stays cheaper in this example, but the gap narrows, and a minimum interest period can tip it the other way on a very early exit.
• Repay early, unused interest not refunded: retained is by far the dearest. Repay at 6 months and you pay £37,079 instead of £23,991 rolled up.
• The break-even: over the full 12 months, a retained rate above about 0.88% a month costs more than rolled up at 0.95%. A discount of less than about 0.07% isn't worth having.

Change the figures in the calculator above to match the terms you've been quoted.

Which should you choose?

• Retained suits a fixed plan where you expect to use most of the term, with a lender that refunds unused interest. Check the refund terms and any minimum interest period in writing.
• Rolled up suits an uncertain or early exit, such as a quick refinance or a sale that may come early, because you only pay for the months used.
• Serviced is often the cheapest and keeps the loan smallest, if you have the income to pay monthly. It also leaves the most room under the lender's maximum LTV.

Questions to ask any lender: is unused retained interest refunded, is there a minimum interest period, does rolled interest compound, and is the fee charged on the gross loan? Then model the total in the bridging loan calculator, and see how bridging loans work: rates and costs.

Frequently asked questions