Rolled Up vs. Retained Interest: A Guide to Choosing the Right Interest Payment Method

Learn the difference between rolled-up and retained interest on loans. Explore how each method works with examples to help you choose the right option for your property finance needs.

Category: Finance

When you take out a short-term or bridging loan, you may encounter two common interest payment methods: rolled up interest and retained interest. These options allow you to defer interest payments during the loan term, making them ideal for short-term projects where cash flow is a priority.

Understanding the difference between rolled up and retained interest is essential to choose the right structure for your needs. This guide explains each method with examples and key comparisons to help you make an informed decision.

What is Rolled Up Interest?

Rolled up interest is a structure where interest is not paid monthly but instead accumulates over the loan term and is added to the principal balance. At the end of the loan, you repay the original loan amount plus the accumulated interest.

This option is useful for borrowers who prefer not to make monthly interest payments and want to defer the entire payment to the end of the loan term.

How Rolled Up Interest Works?

With rolled up interest, interest is compounded, which means it accumulates each month based on the loan balance. At the end of the loan term, the total amount payable includes both the principal and the accumulated interest.

Example of Rolled Up Interest

Principal: £100,000
Monthly Interest: 1% (or £1,000 per month)

Since the interest is rolled up, the borrower doesn’t make any monthly payments, and interest accumulates over the loan term.

Accumulated Interest after 12 Months: £1,000 * 12 = £12,000
Total Repayment at the End of 12 Months:
Principal (£100,000) + Accumulated Interest (£12,000) = £112,000

In this example, the borrower pays £112,000 at the end of the loan term, as they receive the full loan amount upfront but defer all interest payments.

What is Retained Interest?

Retained interest allows the lender to retain the full amount of interest upfront from the loan advance. The lender then uses this retained amount to make monthly interest payments on behalf of the borrower throughout the loan term. At the end of the term, the borrower repays only the principal amount, as the interest has been prepaid.

How Retained Interest Works?

With retained interest, the lender calculates the total interest payable over the loan term at the start. This total amount is deducted from the loan amount, so the borrower receives the loan amount minus retained interest. This method can be advantageous if you want to avoid compounding interest or if the project timeline is relatively short.

Example of Retained Interest

Key Differences Between Rolled Up and Retained Interest

1. Interest Calculation

Rolled Up: Interest compounds and accumulates over time, resulting in a higher total repayment. Retained: Interest is calculated at the start and doesn’t accumulate, keeping the repayment predictable.

2. Loan Advance Amount

Rolled Up: The borrower receives the full loan amount upfront, but owes the principal plus interest at the end. Retained: The borrower receives the loan amount minus retained interest, but only repays the principal at the end.

3. Monthly Payments

Neither: Neither rolled up nor retained interest requires monthly payments, as both options defer payments until the end.

Choosing Between Rolled Up and Retained Interest

Example Comparison of Rolled Up vs. Retained Interest

Conclusion

Choosing between rolled up and retained interest depends on your financial needs and repayment strategy. Rolled up interest provides access to the full loan amount upfront, while retained interest offers a predictable repayment structure by deducting interest at the start. Both methods can support property investments, auction purchases, or short-term funding, so evaluate your project needs carefully to select the best option.