Interest roll-up vs interest-only equity release

Paying interest on your lifetime mortgage: understanding your options

Written in line with our editorial policy.

Equity release plans now often come with the option of making regular interest payments or letting the interest roll-up each month. Each option has its pros and cons, so which one is a better fit for you?

With a range of equity release plans now available, understanding the differences between them is crucial when deciding which option best suits your financial situation. One decision you’ll need to make is whether to pay the interest off each month. You don’t have to do this, but it is worth thinking about.

In this guide we’ll explain the difference between the two types of plan standard ‘roll-up’ lifetime mortgages and interest-only lifetime mortgages. We’ll look at:

• Interest roll-up plans
• Interest-only plans
• When might a standard roll-up plan work for me?
• When might an interest-only equity release plan work for me?
• Voluntary payment option on interest roll-up plans
• Which option could work best for you?
• Speak to a specialist

Interest roll-up plans

With a traditional lifetime mortgage, you borrow a sum of money against your home, with no mandatory payments required during your lifetime. Instead, the interest adds to your loan balance, “rolling up” over time. This interest and the loan itself will need to be paid back via the sale of your property when you pass away or move into long-term care.

As the years pass, the amount you owe increases, with interest compounding on both the original loan and the accrued interest. You can check the effect of this with our compound interest calculator.

While having no mandatory monthly repayments may be attractive, the downside is that the total amount owed will increase significantly. Over the years, this will reduce the amount of property equity available to loved ones as an inheritance. This is an important consideration for those hoping to leave a financial legacy to family members.

Key advantages of interest roll-up equity release plans:

• No mandatory monthly repayments.
• Immediate access to a lump sum or smaller withdrawals.
• Flexibility for those with a limited income.
• Option to make voluntary ad hoc payments on some plans (see further down for more on this).
• You retain ownership of your home until you die or move into long-term care.

Main drawbacks of interest roll-up plans:

• The loan balance can grow quickly due to compounding interest.
• All equity release plans will reduce the value of your estate, but this effect is greater when you don’t pay the interest monthly and instead let it roll up.
• There may be early repayment fees to consider if you wish to repay the loan plus interest early, although some lenders waive these in some circumstances.

You can read more about the broader pros and cons of equity release here.

Interest-only plans

With an interest-only equity release plan, you still borrow against your home, but the key difference is that you make regular payments to cover the interest. By paying off the interest each month, the amount you owe remains the same.

This option might work well if you have a reliable income stream and want to maintain control over the balance owed on the loan. By keeping the debt level steady, you preserve more of your property’s equity, so you’ll be able to leave a bigger inheritance.

Interest-only plans typically let you stop making the voluntary interest payments at any time. At this point, the interest is ‘rolled up’ each month on a compound basis and added to the loan amount, in the same way as with a regular lifetime mortgage.

Key advantages of interest-only:

• Your overall loan does not increase if you keep up with the full interest payments.
• You can access the cash you need whilst protecting the remaining equity in your property for your estate.
• Flexibility to stop making the interest payments and switch to roll-up, should your circumstances change.

Main drawbacks:

• You must have sufficient income to make regular interest payments.
• If your financial situation changes and you can’t make payments, the plan will typically revert to an interest roll-up scheme and your overall loan will grow.
• Fewer providers offer this option compared to the standard interest roll-up.

You can read more about interest-only lifetime mortgages on our dedicated page.

When might a standard roll-up plan work for me?

A standard roll-up lifetime mortgage can be a good fit if you’re looking for a cash boost in later life with minimal obligations to make any payments for the life of the loan. This plan is potentially suitable if:

You have low or variable income

If you don’t have a reliable or high enough income to make regular repayments, a roll-up plan offers the freedom to release equity without the pressure of making monthly payments.

You need a lump sum for immediate needs

Whether you need funds for home improvements, holidays, topping up your day-to-day income or even gifting to family, a roll-up plan provides immediate access to cash without the burden of repayments.

You are less concerned about inheritance

If your focus is on enjoying your retirement rather than leaving an inheritance, the roll-up option might be suitable for you.

When might an interest-only plan work for me?

An interest-only plan might work for you if you wish to manage the size of your overall loan and protect more of your home’s equity. This option might suit you if:

You have the financial means to make interest payments

 Not everyone can afford to make interest payments in the later years – but if you can, an interest-only plan might be suitable. 

You want to maximise the inheritance you leave

If you’re keen to leave money from the sale of your home to loved ones, regular payments covering all or some of the interest can make a huge difference. By continuing with the payments for as long as you can, your estate will retain more of its value for inheritance purposes.

You prefer flexibility in the future

Although you’ll need to commit to making regular interest payments, interest-only plans allow you to switch to a roll-up plan whenever you wish. This option offers a safety net if you can no longer afford to make the payments, or simply choose not to make them anymore.

Voluntary payment option on interest roll-up plans

It is important to note that all lifetime mortgages approved by the Equity Release Council now allow homeowners to make voluntary ad-hoc payments on their plan, without triggering any early repayment fees. 

This option means you can enjoy the freedom of a standard roll-up plan whilst making payments to prevent the loan from growing as quickly – and no commitment to any interest-only monthly payments. 

The total amount you can pay off each year is usually capped at around 10% of your overall loan. Depending on how much you pay off each year, you could slow the growth of interest on your loan. This can lead to a substantial saving on the overall cost of equity release.

Analysis by the Equity Release Council in July 2024 shows how a ‘typical’ equity release customer, taking a £60,000 initial lump sum with a drawdown scheme, could reduce their long-term borrowing costs.

It says that regular £100 monthly repayments would save a homeowner almost £17,000 over a decade in total borrowing costs, and almost £50,000 over 20 years. If the payment amount was £200 a month, those savings jump to nearly £34,000 and £99,000.

Which option could work best for you?

Still unsure whether an interest-roll lifetime mortgage or an interest-only lifetime mortgage is the better option for your needs? Use the table below to directly compare the differences between the two plans:

As with any other big financial decision, choosing between an interest roll-up and interest-only plan depends largely on your personal circumstances and financial objectives. If maintaining control over your loan balance is important to you and you can comfortably afford the repayments, the interest-only option may be more suitable. 

On the other hand, if you prefer the flexibility of not having to make monthly payments, the interest roll-up option with an ad hoc payment facility might be a better fit. However, it’s crucial to understand the long-term impact on your home equity if you leave the interest to roll-up.

Ultimately, both options allow you to stay in your home without the risk of losing it if you cannot afford the monthly interest payments. However, careful consideration is needed as equity release is typically a lifetime commitment and a plan will reduce the value of your estate. 

For this reason, seeking specialist advice is always recommended to ensure you choose the best option for your unique needs. You also require professional advice to help you explore other options: equity release might not be the best way for you to meet your financial needs and other, cheaper options might be available.

Speak to a specialist

If you are considering equity release, our selected advisers can arrange a comparison of suitable plans and equity release rates from leading providers. They will help you assess the suitability of equity release and the different options available.

Call us on 0808 178 3055 and we’ll arrange a free, no-obligation appointment. If you’re unable to talk now, request a call back and we’ll call when it’s convenient to you.

About Clare Yates. With over a decade’s experience writing about later life financial planning, Clare offers a wealth of knowledge about equity release, pension annuities, wills, LPAs and more. When she isn’t writing, Clare likes to spend her time baking and going on walks with her husband, two children and their rescue dog. Follow Clare on LinkedIn