Serviced vs Retained Interest
Serviced interest requires the borrower to make monthly interest payments out of their own cash flow, whereas retained interest is deducted entirely from the initial loan advance.
When structuring short-term development finance or bridging loans, developers have a choice on how to handle the heavy interest burden: Serviced or Retained.
Serviced Interest means the borrower must pay the interest bill every single month. Lenders will rigorously check the borrower's external income and cash flow to ensure they can afford these payments, as the development site itself is not generating rent.
The Advantage of Retained
Retained Interest is far more common for heavy refurbishments. The lender calculates the total interest for the 12-month term and deducts it from the day-one loan amount. The developer makes zero monthly payments. The massive advantage is that it removes cash flow pressure during the stressful build phase. The disadvantage is that you are technically paying interest on interest, as the retained amount is added to your gross loan balance from day one.