How bridging loan interest works

How bridging loan interest works

Bridging loan interest is quoted monthly, calculated on the gross loan amount, and structured in one of three ways: serviced, rolled-up, or deducted. The structures are mutually exclusive, and the choice shapes both the cash flow during the term and the total cost.

Serviced interest. The borrower pays interest monthly and repays the capital in full at exit. Serviced interest requires an affordability assessment. Evidence of sustainable income such as employment income, rental surplus, or business cash flow, and is not offered by all lenders. Its advantage is cost: the borrower receives the full advance, pays interest only while the loan runs, and stops paying the moment the loan exits early.

Rolled-up interest. Interest accrues through the term and is paid in one sum at exit, with no monthly payments. Because repayment does not rely on monthly income, lenders do not assess affordability in the same way.

Deducted (retained) interest. Interest for the whole agreed term is calculated upfront and deducted from the advance, with no monthly payments. Worked example: on a gross loan of £500,000 with 12 months' interest of £45,000, the net funds released are £455,000, but interest is charged on the full £500,000, not the £455,000 received.

Choosing between them comes down to income and exit certainty. Rolled-up or deducted interest suits borrowers who cannot easily evidence income. The self-employed, SPVs, developers between projects, or anyone holding a non-income-producing asset during works. Serviced interest suits borrowers with reliable cash flow, uncertain exit timing, or longer terms of 9 to 18 months, where its lower total cost tells.

Why deducted interest can behave like compounding. Deducted interest is not mathematically compound interest, but three effects push its real cost up in a similar way. First, interest is charged on money the borrower never receives. Borrow £500,000, control £455,000, pay interest on £500,000. Second, exiting early does not refund the deducted interest, so a loan priced for 12 months but exited in 6 carries an effective annualised rate far above the headline. Third, extensions charge additional interest on the original gross balance without releasing any usable capital, so overruns escalate cost quickly. Time, not rate, is what turns deducted interest into a profit killer. The structure is sound when the term is realistic; the mistake is pairing it with optimistic timelines. Experienced borrowers keep deducted terms as short as realistically possible, stress-test the timeline rather than the rate, and consider serviced or part-serviced interest where cash flow allows.