How Interest Works on Equity Release 

If you own your home and you’re aged 55 or over, you might have heard of something called equity release. A way to get money from your house without having to move out exists. This money can help you pay for things like home improvements, holidays, or just everyday costs. 

But how does it work, and what do you need to know about equity release rates and compound interest? Let’s break it down in a simple way. 

What Is Equity Release? 

Equity release is a type of loan for older homeowners. It lets you take some of the money (or equity) tied up in your home. You can take this money as a lump sum, in smaller amounts over time, or a mix of both. You still own your home, and you can live in it for the rest of your life. 

The most common type of equity release is a lifetime mortgage, which is the main focus of this article. You can borrow money based on your home’s value. You only need to repay it when you die or move into long-term care. 

How Does Interest Work on a Lifetime mortgage? 

When you take out a lifetime mortgage, you agree to pay interest on the money you borrow. But instead of making monthly repayments like a normal mortgage, lenders usually add the interest to the loan. We call this compound interest. 

Let’s explain what compound interest means. 

Imagine you borrow £50,000 and the interest rate is 5%. In the first year, the interest is £2,500. That means the total amount you owe is now £52,500. 

In the second year, you don’t just pay interest on the original £50,000. You pay it on the new total – £52,500. 

So now the interest is £2,625. That makes the total loan £55,125. And so it continues, growing each year. People call this rolling up interest, and it can make the debt grow quickly. 

This is why it’s crucial to understand how compound interest works before choosing an equity release plan. 

Can I Stop the Interest from Growing? 

Some lifetime mortgages let you make small payments each month to cover the interest. If you do this, the loan won’t grow over time. We call these interest-serviced plans. You keep the loan at the same amount until you pass away/go into full time care or decide to repay. 

You might find this a good choice if you want to leave more money to your family when you’re gone. But not everyone has the income to make monthly payments in later life, so it’s not always an option. 

Are There Any Risks? 

Yes, like any big financial decision, equity release comes with risks. Because of compound interest, the amount you owe can grow quickly over time. This means there may be less money left to leave to your family. It can also affect your entitlement to certain benefits. If you want to repay the loan early, there might be high early repayment charges. That’s why it’s important to get advice from a qualified equity release adviser and make sure the plan is right for you.