01
No monthly payments
Deducted interest requires no monthly servicing, which is ideal where the property produces no income during the loan term or where cash flow must be preserved.
Mortgage guide
Deducted and retained interest bridging loans
The advantages and drawbacks of deducting interest from a bridging loan.
Joseph Lane
CeMAP · FCA authorised firm
- Published
- 13 Apr 2026
- Last reviewed
- 11 Sep 2026
- Reading time
- 3 min
Deducted and retained interest bridging loans
Pros of Deducted (Retained) Interest bridging loans
02
Certainty of cost upfront
Interest is calculated at the outset, giving clear visibility of total interest (assuming the loan completes within the agreed term). This can simplify budgeting.
03
Easier approval where income is irregular
Deducted interest is commonly used where borrowers have seasonal income, complex finances, or non-status lending, as no affordability testing for monthly payments is required.
04
Simpler cash flow management
Because interest is settled at redemption, borrowers can focus capital on acquisition, refurbishment or stabilisation without worrying about monthly outgoings.
05
Well suited to short, predictable exits
Where the exit is highly certain and time-bound (e.g. auction flip, known refinance date), deducted interest can be operationally efficient.
Cons of Deducted (Retained) Interest
01
Higher effective cost of borrowing
Interest is charged on the gross loan amount, even though part of the capital is deducted upfront. This increases the true cost of capital compared to serviced interest.
02
Interest paid on money never received
Because interest is withheld at the outset, borrowers pay interest on funds they do not control, which can materially reduce capital efficiency.
03
Punitive if timelines change
If the exit occurs earlier than expected, deducted interest is usually not refunded, increasing the effective annualised rate. If the loan overruns, additional interest is charged on the gross balance, escalating cost quickly.
04
Less flexibility on extensions
Extensions can be expensive, as further interest is added without releasing additional usable capital. This is where deducted interest can significantly erode profits.
05
Not ideal for uncertain exits
Where planning, legal or construction risk exists, deducted interest can amplify downside risk because time overruns directly increase cost.
Bridging calculator
Estimate the gross loan against property value before interest, fees and retained amounts.
Indicative estimate only, subject to lender criteria and valuation. This is not a mortgage offer. Your property may be repossessed if you do not keep up repayments.
Bridging Loan Criteria
For context, these are the wider product terms covered by this guide. Availability and eligibility depend on your circumstances and the lender.
| Criteria | Detail |
|---|---|
| Borrowers | Personal, limited company (Ltd co), LLP and offshore trusts, depending on the lender |
| Repayment type | Interest only or repayment |
| Term | Short term. The maximum term varies by lender; in our experience the minimum term is usually 1 month, and 3 months with some lenders |
| Experience | Not always required; it depends on the lender and the exit |
| Max applicants | Varies by lender |
| Valuation types | Automated valuation (AVM), Market Value 1 (MV1) yield based, market value (MV), 180-day or 90-day value, depending on the lender and how it labels the valuation basis |
| Regulated and unregulated | Yes, both: regulated where the borrower or a close family member lives, or will live, in the property |
| Credit searched | Usually, depending on the lender |
| Credit scored | Varies by lender; the decision rests mainly on the property and the exit |
For context, these are the wider product terms covered by this guide. Availability and eligibility depend on your circumstances and the lender.
| Loan to value | Rate |
|---|---|
| 65% LTV | 0.62% per month (2% lender fee) |
| 75% LTV | 0.72% per month (2% lender fee) |
| 85% LTV | 0.9% per month (2% lender fee) |
Some buy-to-let and commercial mortgages are not regulated by the Financial Conduct Authority.
For context, these are the wider product terms covered by this guide. Availability and eligibility depend on your circumstances and the lender.
| Feature | Detail |
|---|---|
| Additional Security | 100%+ |
| Residential | 90% |
| Commercial | 75% |
| Land | 70% |
Some buy-to-let and commercial mortgages are not regulated by the Financial Conduct Authority.
Related case studies
Frequently asked questions
What is deducted interest in a bridging loan?
Deducted interest involves rolling up the interest payments into the loan amount, which is then repaid in full at the end of the term. This preserves cash flow during the loan term but results in a larger lump sum repayment.
What is retained interest on a bridging loan?
Retained interest is interest for the whole term calculated at the start and deducted from the gross loan, so there are no monthly payments. It reduces the net advance, and any unused interest may be refunded on early repayment, depending on the lender.
How is interest repaid on a bridging loan?
There are typically two methods for repaying interest on a bridging loan:
Serviced Interest:
- Borrowers pay interest monthly, similar to a mortgage but calculated monthly.
- Ideal for those with a regular income who prefer to manage cash flow through ongoing payments.
- Ensures the principal remains constant but requires consistent cash flow for monthly payments.
Deducted (Retained) Interest:
- Interest for the entire loan term is calculated and deducted upfront from the loan amount.
- Suitable for borrowers without regular income during the loan term, such as property developers.
- No monthly payments are needed, but the borrower receives less initial cash.
Choosing between these options depends on the borrower’s financial situation and strategy, making it essential to understand which aligns best with their needs.
What is serviced interest on a bridging loan?
Serviced interest is paid monthly, like a mortgage, so it is not deducted from the loan. It maximises the net advance but requires income to meet the payments throughout the term.
What are the interest rates on farm bridging loans?
Rates vary with the lender, the loan size and the borrower's position, and are generally higher than mortgage rates because the lending is short term.
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