Can you do equity release without compound interest?

Your options for equity release without compound interest

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When you take out a lifetime mortgage, compound interest will mean that the amount owed builds up considerably over the years. But it doesn’t have to be like that, as there are ways to reduce or even remove altogether the amount of interest that must be paid back when the plan ends.

You may have heard about compound interest and the way it can add to the long-term cost of equity release. It’s certainly something to be aware of and to factor into a decision about taking out a plan. However, there are options for avoiding this ‘rolled-up’ interest to maximise how much value is left in your home for you or your family in the years ahead.

Our guide to doing equity release without compound interest looks at:

• What is equity release?
• How does compound interest work on equity release?
• Is it possible to do equity release without compound interest?
• Are there options for reducing the amount of compound interest?
• Get your personalised equity release quote.

We hope this article will help you understand your options for equity release without compound interest. In addition, our selected advisers are available to provide advice, and quotes and illustrations at competitive interest rates from leading UK providers. 

Just call us on 0808 178 3055 or request a call back and we’ll arrange a no-obligation appointment with an adviser for you. Alternatively, check your eligibility and get an initial indication of how much tax-free cash you could unlock.

What is equity release?

If you are aged 55+ and own your own home, even if there is some outstanding mortgage, you may be able to free up some tax-free cash with an equity release plan. Equity release lets you do this without having to sell or move home.

The most popular form of UK equity release is a lifetime mortgage. This is a type of loan secured on your property and involves compound interest, which we explain below. You can also use our compound interest calculator to work out the effect it might have on a plan you are considering.

Equity release may appeal to you as you won’t have to make mandatory monthly repayments. That’s because the loan itself and any accrued interest are typically repaid through the sale of your property when you pass away or move into long-term care.

How does compound interest on equity release work?

With standard residential mortgage interest, you make regular interest payments, usually monthly. There isn’t any outstanding interest, so the lender charges interest only on the original loan amount.

But with a lifetime mortgage, you typically would not make any regular interest payments. That means the lender isn’t seeing a return from their loan each month. To reflect this, the lender charges interest on the loan amount AND the interest already accrued.

Because lenders charge interest on interest, the total amount owed can grow quickly and significantly, making equity release more expensive than some other forms of lending. It can for example reduce any inheritance you are able to leave.

The trade-off of course is that it’s a type of lending where you don’t have to make any repayments in your lifetime. Weighing up the pros and cons on equity release, including the effect of compound interest, is all part of deciding whether this form of later life lending is for you.

Read more: How does compound interest on equity release work?

Is it possible to do equity release without compound interest?

There are ways that you can arrange equity release without compound interest adding to the cost.

Option 1 – An interest-only lifetime mortgage

An interest-only lifetime mortgage is similar to a regular lifetime mortgage but with one big difference: you are able to make voluntary interest payments each month. 

If you pay all the interest due each month, you won’t feel the effect of compound interest. Nothing will be added to the original loan amount: you simply keep on paying the interest as it’s due each month.

Just be aware that you would still pay interest, and at a rate that is typically a little higher than with a standard mortgage. But a significant saving comes by removing compound interest from the amount that needs to be paid back when you pass away or move into long-term care. At this time, you or your estate would just pay back the original loan amount via the sale of your home.

Interest-only plans typically allow you to stop making the interest payments at any time. But please be aware that once you stop paying the interest, the lender will apply compound interest from that point through to the end of the plan. But even if that happens, a no-negative equity guarantee would mean that the amount owed by you or your beneficiaries would never be more than the value of your property when the plan ends.

Some plans do however let you take a holiday from interest payments. For example, a ‘Just For You Lifetime Mortgage’ from Just equity release lets you take one payment holiday of three months each year, subject to terms and conditions. The lender will however add the interest you don’t pay to the loan, and it will then build up on a compound basis.

Option 2 – A home reversion plan

A lifetime mortgage is by far the most popular type of UK equity release. But there is an alternative to people aged 60+ looking for equity release without compound interest.

With a home reversion plan, rather than take out a secured loan, you sell all or part of your home to an equity release provider. You can take this as a lump sum, income payments, or a mix of both.

You then have the right to stay in your home as a tenant, but without having to pay any rent. When you pass away or move into long-term care, your home is sold to repay the home reversion company. Any money left is available to you or to leave as an inheritance. 

The home reversion company won’t know when it will get its money back, and they won’t know what will happen to house prices in the coming years. To reflect the risk they are taking, they typically pay 30–60% of the current market rate for your home or the share they buy. The older you are, the bigger the percentage you might receive.

Can I reduce the amount of compound interest that’s owed?

If you can’t afford to make full interest payments on a lifetime mortgage, or don’t want to, there are ways that you can reduce the amount of compound interest that accrues on your plan.

One option is to take out an interest-only lifetime mortgage, but make partial interest payments each month rather than paying all the interest due. The lender will add any unpaid interest to the loan, and compound interest will be applied to it. 

Another option is to pay off some of the lifetime mortgage early, rather than have it all paid back through the sale of your home. This will reduce the loan amount, and therefore the amount of interest that compounds over the lifetime of the loan. Lenders typically let you repay up to 10% of the loan each year without penalty: any more than this can mean paying early repayment charges.

Finally, a drawdown lifetime mortgage is another way to reduce the amount of interest that accrues on the loan. By taking your tax-free equity release cash in stages rather than as a single lump sum, interest only starts to accrue as and when you take each release.

Get your personalised equity release quote

To find out more about taking out equity release without compound interest building up, and to get competitive quotes from leading providers, call our friendly team on 0808 178 3055. They can arrange an appointment with one of our selected advisers who can answer all your questions, check your eligibility and get personalised quotes.

Alternatively, check your eligibility and get an initial indication of how much tax-free cash you could unlock.