What is the key difference between retained and serviced interest?
Retained interest means interest is added to the loan, while serviced interest involves regular payments. Each has different implications for cash flow and overall cost.
In property finance, understanding the difference between retained and serviced interest is crucial for managing cash flow and overall loan costs. Retained interest means the interest payments are added to the loan amount rather than being paid regularly during the loan term.
With retained interest, the borrower doesn't need to make monthly interest payments, which can be beneficial for projects with limited initial cash flow, such as property developments. However, the total amount repaid will be higher because interest is charged on the accumulating interest.
Serviced interest, on the other hand, involves making regular interest payments throughout the loan term. This provides more predictable cash flow and results in a lower total repayment amount compared to retained interest. The choice between the two depends on the borrower's financial situation and project requirements.