Retained interest or rolled up interest or serviced interest?

Retained interest or rolled up interest or serviced?

Which is best?

When considering a bridging loan, retained interest or rolled up interest are the most popular options. Interest always has to be paid on bridging loans and it can be paid in several different ways. Firstly, there is retained interest, which is a popular interest type in bridging finance. Secondly, you have rolled up interest, also known as capitalised interest. And finally, there is serviced interest.

Here’s some examples for illustrative purposes:
(Note: any fees etc have been excluded to keep the examples simple)

Retained interest

Retained interest means that interest paid on a loan isn’t paid monthly. Instead, all the interest on the term is subtracted from the initial bridging loan sum. Consequently, you would be expected to pay back the full amount you originally applied for at the end of your term.

• You take out a gross bridging loan to the value of £100,000
• Interest on the loan is set at a rate of 1% a month 
• Therefore, over a 12 month loan period, the lender would deduct £12,000 from the loan and you would receive £88,000 (12% of £100,000 = £12,000).
• So, in 12 months time, you would be expected to pay back the full £100,000
• If you settled the loan just before 6 months, you will get a rebate on the remaining interest. With a rebate of £6000 you would only pay back £94,000 .

Rolled up interest

Rolled up interest on a bridging loan is applied to the balance owing each month. If you take the loan over 12 months, the rolled up interest is calculated at the outset on a monthly basis. Rolled up interest is sometimes be referred to as capitalised interest.

Here is an example of rolled-up interest for a loan of £100,000 with 1% interest per month:

• You take out a gross bridging loan to the value of £100,000
• Interest on the loan is set at a rate of 1% a month 
• Therefore, over a 12 month loan period, the lender would deduct £12,682.47 from the loan and you would receive £87,318
• If you settled the loan just before 6 months, you will get a rebate on the remaining interest. However the rebate will be slightly less than the retained interest example

You can see that the compounding nature of the interest means that the total interest paid is slightly higher. Comparing a retained interest loan, after four months the interest would be £4000. With the rolled up interest loan it would be £4,060.30. Slightly higher but not enough to deter most people if the remaining terms of the loan are favourable.

The key point in both of these examples is that you are not paying the interest each month. Instead you are borrowing a sum of money as part of the loan. This will cover the interest payments for you until the whole loan is repaid. Therefore you are paying interest on this amount too.

Serviced interest

Serviced interest is arguably the more straightforward of the three interest types. So, it is interest on a loan that you pay off on a monthly basis. Here is an example:

• You have a loan of £100,000 over a 12 month period
• Interest on the loan is set at rate of 1% per month
• So, you will pay £1,000 monthly interest on the loan. That’s £12,000 over a 12 month term

However, interest types used vary from lender to lender. So, one lender may use retained interest while another may use rolled-up interest. 

So, you can see that the difference in cost between these options isn’t great. By adding the interest to the loan you will pay a little extra in interest.

Impact on how much you can borrow

To keep the math’s simple, let’s say you are borrowing a 75% loan to value (LTV) loan over 12 months, at 1% per month on a property valued at £100,000. This means you will get a gross loan of £75,000 less any fees or interest deducted at completion.

Where you are servicing the loan each month there is no interest to be deducted. Therefore, the amount you get in hand will be approaching £75,000.

However, If you chose to retain or roll up the interest into the loan, this amount is deducted from the gross loan at completion. Using the examples above, you would receive £12,000 to £12,682 less in hand.

This becomes very important when you are trying to raise the maximum LTV on a bridging loan. If there is plenty of equity available it is less of an issue for most borrowers.

Is Serviced interest a better option?

Maximise the amount of cash you raise, by considering a serviced loan. However, lenders will only agree to this if you can demonstrate you can afford to service the loan, as well as your other outgoings. If you have another mortgage this can be a challenge. Also, having affordability checks means supplying extra information and can slow the process down, when the idea of bridging is often speed.

In conclusion, if you are considering bridging finance, there are many factors to think about. However, there may be aspects that you could be unsure about, such as extra costs or the type of interest. If you’re still unsure about whether bridging is right for you, contact Promise Money. We can go through your options, and help get you on the path towards your own bridging loan. Speak to one of our experts today!

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