Equity release compound interest calculator

What is compound interest on equity release, and how much can you expect on your plan?

If you are looking into later life lending, you may have heard about equity release and compound interest. Use our equity release interest calculator to understand how it might affect your own plan.

When you take out a lifetime mortgage (the most popular form of equity release) compound interest will be charged on the loan. This can build up considerably over the term of your plan, so it is important that you know what to expect.

To help you, read our guide to how compound interest works below, and use our free equity release compound interest calculator:

• What is equity release?
• How is equity release compound interest calculated?
• Interactive equity release interest calculator
• Would future property value increases partly offset compound interest?
• How do lenders set their equity release interest rates?
• Can I get equity release without compound interest?
• Can I reduce the amount of compound interest that’s owed?
• Get your personalised equity release quote

We hope this article will help you understand compound interest, with the equity release compound interest calculator below helping you to calculate it for a plan you might be considering.

In addition, our selected advisers are also available to provide 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.

What is equity release?

An equity release plan allows homeowners aged 55+ to unlock a percentage of their home’s value without having to sell up, move house or arrange a remortgage. A lifetime mortgage is the most popular type of equity release plan in the UK, and lenders charge compound interest on this type of loan. 

You do not need to make mandatory monthly repayments of the loan capital and interest. Instead, the loan plus interest is typically repaid through the sale of your property when you pass away or move into long-term care. Any money left is available to you or your beneficiaries.

How is equity release compound interest calculated?

Compound interest on equity release is not the same as some other forms of compound interest. It’s therefore important that you understand how it works before committing to equity release.

With a lifetime mortgage, the lender charges interest on the loan amount AND the interest already accrued. Contrast this with standard residential mortgage interest, where the lender charges interest only on the original loan amount.

The effect of compound interest on equity release is that the total amount owed grows at a faster rate than with standard loan interest. It also grows faster because typically you won’t pay any of the interest during the term of the loan itself.

Just how much interest builds up will depend on the size of the loan, the interest rate (usually fixed when you take out the loan) and how long the loan runs for. To get a view of current interest rates, visit our equity release interest rates page, where you will find the top ten lowest interest rates for UK lifetime mortgage plans.

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

Interactive equity release interest calculator

You can work out how much compound interest will accrue on a lifetime mortgage using our equity release compound interest calculator. 

Because the calculator is interactive, you can enter multiple combinations of information to see how much interest will accrue on your plan in different circumstances.

You just need to enter three pieces of information into the interest calculator:

Amount of equity released. For a lump sum lifetime mortgage this will be the one-off payment that you’ll receive when taking out your plan. For a drawdown lifetime mortgage, entering the total amount of money you expect to release will produce the maximum amount of interest that will accrue as a guide.

Number of years. This is the number of years that your lifetime mortgage would run for (its term). It is of course impossible to accurately predict this as none of us know when we will pass away or move into long-term care. You may wish to enter some different terms into the calculator to compare the effect of compound interest in each scenario. 

Interest rate. This is where you enter the interest rate offered by an equity release provider. Some providers use an annual rate (as used in our calculator) but some providers use a monthly rate. 

Note: Calculator is for illustrative purposes and your chosen provider may have a different method for calculating and charging interest. 

For personalised quotes showing interest from different providers based on your own circumstances, the type of plan and the way each provider calculates interest, why not talk to one of our selected advisers? Call us on 0808 178 3055 or request a call back at a time that suits you and we will arrange an appointment for you.If you are considering an equity release plan then make sure you speak to our friendly team. After answering your initial questions, we can connect you to a specialist adviser for further help. 

Would future property value increases partly offset compound interest?

When you look at the total amount owed at the end of your plan, you should also bear in mind that the value of your property could increase. 

For example, the equity release interest calculator might show the amount owed after 20 years as £80,000. If your property is currently worth £250,000 that would mean approx. £170,000 would be left for you or to leave as an inheritance.

But your property value could well increase in that time, meaning that there would be more left after the sale of your house. In fact, Office of National Statistics data shows that the average UK house price in August 2022 had risen by 13.6% to £296,000 in just a single year.

How do lenders set their equity release interest rates?

Equity release providers link their interest rates to the current price of government bonds and the return on them (known as gilt yields). They also factor in potential future changes in gilt rates, and possible changes in property values.

You can read more about how interest rates work in our guide to equity release interest rates.

Can I get equity release without compound interest?

It is possible to remove the cost of compound interest from your equity release plan. There are a number of ways to do this:

Choose an interest-only lifetime mortgage

This is where you have the option of paying the full interest each month. By doing so, the amount you owe won’t increase over time. At the end of the plan (when you pass away or move into long-term care) just the original loan amount will be repaid through the sale of your home. As with other types of lifetime mortgages, these plans are available to people aged 55+.

Some interest-only plans allow you to stop making the interest payments at any time. However, from that point on compound interest will be charged in the same way that a regular lifetime mortgage works. 

Choose a home reversion plan

This is an alternative to a lifetime mortgage and involves selling all or part of your home to an equity release provider. You can then remain in your home rent-free for the rest of your life or until you move into long-term care. At that time, the home is sold to repay the home reversion company and any money left is available to you, or to leave as an inheritance.

There is no compound interest with home reversion, which is available to people aged 60+. However, the money you receive will be much lower than current market value. Home reversion providers typically pay 30–60% of the current market rate. The older you are, the higher the percentage of your home’s market value you’re likely to be offered.

Read more: Can I do equity release without compound interest?

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

There are ways that you can reduce the amount of interest that builds up on your equity release plan. For example, you could choose an interest-only lifetime mortgage and pay some of the interest each month, rather than all of it.

You also have the option of paying off some of the equity release loan amount early, as and when you are able. You are typically able to pay off up to 10% each year without penalty, but any more than this may involve paying an early repayment charge.

Another way to reduce the amount of interest owed is opting for a drawdown lifetime mortgage. This lets you take an initial lump sum from your home’s equity, and then draw additional cash instalments over time. Interest on this type of plan won’t mount up as quickly as with a regular lump sum lifetime mortgage. This is because you only accrue interest on the cash you release, so your remaining fund can wait – unaffected by interest –  until you need more from it. 

Get your personalised equity release quote

To find out whether equity release could work for you, and to get quotes from leading providers to help you choose the best option, call our friendly team on 0808 178 3055. They can connect you to one of our carefully selected advisers who can answer all your questions, check your eligibility and get personalised quotes.

Alternatively, request a free call back here or get a free quote and an initial indication of how much tax-free cash you could unlock.

About Richard Groom. A writer with 20+ years’ experience across several sectors including financial services, Richard has a passion for writing clear and simple content on even the most complex of subjects. In his spare time, Richard loves exploring the hills and mountains of the UK on long walks with his faithful cocker spaniel. Follow Richard on LinkedIn