Definition
Retained interest is an interest treatment in which the lender calculates the full interest payable over the facility term upfront, deducts it from the advance at drawdown, and retains it as a reserve. The borrower receives less cash on day one (the net advance) but does not owe compound interest building on exit.
Unlike rolled interest — which compounds monthly and adds to the exit balance — retained interest is a simple calculation on the loan amount (advances) at inception. The total cost may be broadly similar but the cash flow profile differs significantly: the borrower pays interest forward at drawdown rather than as a lump sum at repayment.
Formula
Retained Reserve = Loan Amount × Monthly Rate × Term (months)
Retained interest is a flat reserve calculated on the loan advance, not compound. Gross facility for retained structures is advances plus fees — the retained reserve reduces the net advance to the borrower but is not added to gross facility.
Net Advance = Advances − Retained Reserve
Worked Example
Worked Example
£1,000,000 bridge. 0.85% monthly rate. 12-month term. Retained interest. Arrangement fee 2%, exit fee 1%.
Simple interest on loan amount (advances)
Retained reserve £102,000 + arrangement fee £20,000 + exit fee £10,000
Retained vs Rolled — Direct Comparison
| Dimension | Retained | Rolled |
|---|---|---|
| Interest calculation | Simple (flat) | Monthly compound |
| Net advance | Lower (reserve deducted) | Full advances |
| Gross facility | Lower | Higher |
| LTGDV impact | More favourable | Less favourable |
| Exit balance | Fixed gross facility | Compounded balance |
| Lender income risk | Lower (collected upfront) | Higher (exit collection) |
How Brokers Use Retained Interest
Retained interest is the right choice when the borrower can absorb a lower net advance — typically when they own the property outright and the bridging is for refurbishment or working capital, not for acquisition funding where every pound of advance matters.
Brokers should present both retained and rolled scenarios when LTGDV is tight. A retained structure may bring LTGDV within a lender’s threshold that rolled would breach. The tradeoff is whether the reduced net advance is serviceable for the borrower’s plans.
Common Mistakes
- Calculating retained interest on the true gross facility rather than loan amount. The retained reserve is calculated on the loan amount (advances). The true gross facility — advances + arrangement fee + exit fee — is derived after the interest calculation. Applying the rate to the gross facility (which already includes fees) would overstate the reserve.
- Adding the retained reserve to gross facility. Gross facility for retained structures does not include the retained reserve. Adding it would inflate gross facility and produce an incorrect LTGDV.
- Confusing retained interest cost with rolled interest cost. Retained uses simple interest on loan amount (advances); rolled uses monthly compound on the same base with interest accumulating on the outstanding balance. For the same rate and term, retained is typically slightly less expensive in total.
Frequently Asked Questions
What is the difference between retained and rolled interest?
Retained interest is deducted from the advance upfront — the borrower receives less cash on day one but has no compound interest building. Rolled interest is added to the outstanding balance monthly and is repaid at exit. Rolled produces a higher gross facility but a higher net advance.
Is retained interest calculated on a simple or compound basis?
Retained interest uses simple interest: Loan Amount × Monthly Rate × Term. It does not compound because it is calculated on the loan amount (advances) at inception and collected upfront, not allowed to accrue. The true gross facility — loan amount + arrangement fee + exit fee — is derived separately after the retained reserve is computed.
Does retained interest affect LTGDV?
Retained interest affects gross facility calculation. For retained structures, gross facility = advances + arrangement fee + exit fee (the retained reserve is not added to gross facility). This typically produces a lower LTGDV than an equivalent rolled structure.
When do lenders prefer retained interest?
Lenders prefer retained interest when they want certainty of income delivery upfront and reduced counterparty risk on interest collection. Borrowers with lower net-advance requirements or those with early exit prospects may prefer retained structures for a cleaner repayment profile.
Can I change interest treatment mid-term?
Interest treatment is set at facility inception in the loan agreement. Changing treatment mid-term requires a deed of variation and lender agreement. It is not standard practice.