Glossary
Serviced interest
Also called: interest paid monthly
Serviced interest is paid regularly, usually monthly, from the borrower's own funds or income during the loan term. The loan balance stays the same unless principal is also repaid.
An example
An investor with a leased commercial property pays interest each month from the rent. The loan balance stays level until the property is refinanced at the end of the term.
Why it matters
Servicing interest keeps the debt from growing, but the borrower must show they can meet the payments. Lenders assess the source of payments, such as rent or business income, when they are asked to accept serviced interest.
Points to check
Check that you can meet monthly interest payments from your income throughout the term, including if the rate changes. Ask what happens if a payment is missed and whether default interest applies. Compare the total cost with capitalised or prepaid interest, because serviced interest keeps the balance steady and avoids interest on interest, but requires cash flow.
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