Having the right interest payment structure for your bridging loan could save or cost you thousands of pounds.
Before you make this important decision, here’s what you need to know about how each option works.
Your Interest Payment Options
When you take a bridging loan you’ll need to understand the different options for how the interest is charged.
Each has its own benefits and what works best is often down to your situation and cash flow.
However, not all lenders offer all of these choices, and some lenders will decide for you.
Monthly Serviced Interest
Possibly the easiest to understand.
Monthly serviced interest works like your standard interest-only mortgage – you pay the interest based on the amount you borrowed, month by month during the loan term.
Let’s say you borrow £250,000 at 1% monthly interest. Each month you’d need to pay £2500 in interest. It’s simple, predictable and helps you keep costs under control.
This option is ideal for property investors who have rental income or steady cash flow from elsewhere. For example if you’re buying a tenanted property the rental income could cover your monthly interest payments.
The upside?
Your overall costs are lower because you’re not allowing interest to build up.
Plus making regular payments can help when negotiating rates with lenders. Just remember you’ll need to have a reliable and provable income to meet these monthly commitments.
Retained Interest Bridging Loan
Retained interest works differently.
Your lender will calculate all the interest over the length of your planned loan term. This total amount is then taken (retained) from your initial loan amount.
Here’s a real example to show how it works:
You need to borrow £300,000 for 12 months at 0.95% monthly interest. The total interest is £34,200. Instead of getting £300,000 you’d get a net loan of £265,800 and £34,200 would be held back to cover all your interest.
This works well for auction purchases where you need to know the figures up front. You won’t have monthly payments to worry about and you’ll know your costs from day one.
The main consideration?
You may need to borrow more initially to get the amount you actually need for your project. And the loan term affects the net loan, as the amount deducted is larger.
Rolled-Up Interest
With rolled-up interest your monthly interest gets added to what you owe and you don’t make any payments during the loan term.
Interest is applied to the balance owing each month. Therefore, your debt grows each month as interest compounds on interest.
Let’s look at a real example with some simple numbers:
You borrow £200,000 at 1% monthly interest.
Here’s how your balance grows:
- First month: Your £200,000 loan gains £2,000 interest, becoming £202,000
- Second month: Your £202,000 balance gains £2,020 interest, reaching £204,020
- Third month: The £204,020 gains £2040 interest, growing to £206,060
- Fourth month: Your £206,060 balance gains £2060 interest, reaching £208,120
You can see how each month’s interest amount creeps up because you’re paying interest on previous months’ interest too. While this difference might seem small monthly, it adds up over your loan term.
The maximum LTV percentage is what the gross loan is calculated against. So if the loan runs full term, without any issues, you would owe the maximum LTV, comprising of initial loan, plus fees, plus interest.
Developers often choose this option during renovation projects when the property isn’t bringing in any income. Just remember your final repayment will be higher than what you borrowed initially.
Gross vs Net Loans Explained
This is important.
Many borrowers focus solely on interest rates and top level LTVs when comparing bridging loans, but understanding the difference between gross and net loan amounts is just as important.
These two figures can vary significantly, and mixing them up could leave you short of funds or overestimate your borrowing capacity.
Let’s see how your interest choice affects your actual borrowing power.
Take a property valued at £200,000 where you’re seeking a 75% LTV loan (£150,000) at 1% monthly interest over 12 months:
- With monthly serviced interest: You’ll receive nearly the full £150,000, as you’re paying interest monthly
- With retained interest: You’ll receive about £9,000 less (around £66,000) as the year’s interest is deducted upfront
- With rolled-up interest: You’ll receive slightly less than the retained interest option due to compounding
Gross Loan Amounts
The gross loan amount is everything – your actual funds plus all the extras like fees and interest charges. Lenders use this total to calculate your loan-to-value (LTV) ratio.
Here’s what this looks like in practice:
Your property is worth £500,000 and you need £350,000.
70% LTV at this point.
Add in a 2% arrangement fee (£7,000) and 12 months’ retained interest at 0.9% (£37,800) and your gross loan becomes £394,800.
This makes your LTV 78.96%.
Net Loan Calculations
The net loan is what actually lands in your account.
Using our example:
Your gross loan of £394,800 minus the £7,000 arrangement fee and £37,800 retained interest leaves you with £350,000 – your net loan.
This “in-hand” amount is what matters most for your project. Be careful when comparing loans – some lenders quote net figures to look more competitive but the gross amount is what you can actually borrow.
The Right Interest Option
Your choice of interest option should match your property project and financial situation. Monthly payments might be perfect for one scenario but a cash-flow nightmare for another.
A buy-to-let purchase: If you’re buying a property that’s already tenanted, monthly interest payments make sense. The rent covers your interest and you’ll pay less overall. But what about a property that needs work?
That’s where rolled-up or retained interest comes into play.
Let’s look at a practical example: You’ve found a £400,000 property at auction. It needs £50,000 of work before it can earn any income and you have 6 months to complete the work. In this case retained interest would free you from monthly payments while you focus on the renovation with clear costs from the start.
Different projects require different approaches:
Auction buys: Retained interest usually works best. You’ll have your total costs figured out before you bid and no monthly payments to worry about during the quick completion period.
Renovation projects: Rolled-up interest usually suits. You can put more money into the actual work rather than paying interest monthly but your final payment will be larger.
Breaking a property chain: Monthly serviced interest often makes sense if you have income from an existing property to cover the payments.
Other Costs
Your actual interest rate will depend on your exit strategy, the property, the lender, your track record with similar projects and loan-to-value ratio.
But don’t get too hung up on the monthly rate. A loan at 0.89% monthly with retained interest might end up costing more than one at 0.95% with monthly payments depending on your situation.
In addition to the interest rate you’ll need to budget for other costs. Arrangement fees are usually around 2% of the loan amount – that’s £10,000 on a £500,000 loan. Valuation fees vary but usually £800-£2,000. Legal work, covering both your solicitor and the lender’s legal team usually £1,500-£3,000 for simple cases.
Getting the Right Advice
Choosing the right interest structure for your bridging loan isn’t always straightforward.
While monthly payments might look cheaper on paper, they might not suit your cash flow. And though rolled-up interest requires no monthly outgoings, it could reduce your borrowing power.
That’s where specialist bridging loan brokers prove invaluable.
At Respect Capital, our brokers look beyond just finding you a competitive rate. We’ll assess your entire project, from purchase and refurbishment costs to your exit strategy, ensuring your interest structure aligns with your goals.
Most importantly, we’ll explain everything clearly, using real numbers for your specific situation. You’ll understand exactly what you’ll pay, when you’ll pay it, and how much money you’ll receive upfront.
Want to explore your bridging loan interest options? Call us for a no-obligation chat about your project. We’ll help you understand which interest structure might work best for you.
FAQ
Unlike standard mortgages that quote annual rates (APR), bridging loans charge monthly interest rates. This reflects their short-term nature and helps you understand your monthly costs more clearly.
Yes, most lenders will refund unused retained interest if you settle early. For example, if you have a 12-month loan but repay after 6 months, you should receive a refund for the unused 6 months of retained interest.
Not typically. Your choice of interest options usually depends more on your exit strategy and the property’s value rather than your credit rating. However, if you want monthly serviced interest, lenders will look at your ability to make regular payments.
Some lenders allow this switch, particularly when your property starts generating income after renovation. However, this flexibility needs to be agreed upon upfront and might affect your initial interest rate.
Your interest choice directly impacts your net loan amount.
For example, on a £100,000 gross loan with retained interest at 1% monthly for 12 months, you’d receive £88,000 after interest deduction. With serviced interest, you’d receive the full £100,000 but need to make monthly payments.
Retained interest provides certainty for both parties.
The lender knows the interest is secured, and you know exactly what you need to repay. This clarity is particularly useful for auction purchases where you need precise figures for budgeting.
Hopefully this won’t happen.
Missing payments can incur default interest (higher than your standard rate) and could trigger a loan default. Always discuss any potential payment issues with your lender early to explore options.
Yes.
Most bridging loans don’t require any monthly payments. With serviced interest you are only paying the interest charges for each month, without any capital repayment.
Bridging finance is repaid all in one go when the loan finishes.
Related reading: Can You Pay a Bridging Loan Back Early?
Most borrowers choose either a retained interest loan, or rolled-up interest, which do not require any monthly repayments.
With a serviced interest loan you need to pay the interest charged on a monthly basis.
Retained interest means the total interest cost is deducted from your loan amount upfront, rather than paid monthly. This is calculated over the full term that you have selected (6 months, 12 months, 18 months etc).
For example, on a £500,000 loan at 1% monthly interest for 12 months:
- Total interest: £60,000 (£500,000 x 1% x 12)
- Amount you receive: £440,000 (£500,000 – £60,000)
- Amount you repay: £500,000
This structure means:
- No monthly payments needed
- Interest costs are clear from the start
- You receive less money initially
- Early repayment doesn’t reduce interest costs
Retained interest suits borrowers who won’t have regular income during the loan term, like property developers working on a renovation project. However, if you can make monthly payments, other interest options may cost less overall.
