How does the compound interest on equity release work?
Compound interest is charged either monthly or annually depending on your chosen scheme; here’s how it works:
Monthly interest lifetime mortgages:
- The loan is secured with either a fixed or a capped equity release interest rate
- Interest is added to the loan each month based on the original loan plus the interest accrued each month
Yearly interest lifetime mortgages
- The loan is secured with either a fixed or capped equity release interest rate
- Interest is added to the loan each year based on the original loan plus the interest accrued each year
A Simple Example
| Year |
Loan |
6% Interest Rate |
Total owed |
| 1 |
£50,000 |
£3,000 |
£53,000 |
| 2 |
£53,000 |
£3,180 |
£56,180 |
| 3 |
£56,180 |
£3,370 |
£59,550 |
| 4 |
£59,550 |
£3,573 |
£63,123 |
| 5 |
£63,123 |
£3,787 |
£66,910 |
| This is the Equity Release Council’s example of how the annual payments on a £50,000 loan with an interest rate of 6% could work |
Therefore as you are paying interest on interest accrued, the size of the loan grows more quickly than with a standard mortgage, but more so with the monthly interest equity release plan.
Do keep in mind though that although your equity release loan will be growing, hopefully so will the value of your property and therefore the equity available to you.
How much does equity release cost to set up?
The cost of equity release includes the loan and interest, which are only repaid once you die or move into care, plus the cost of arranging the loan in the first place. According to the Equity Release Council, this currently costs between £2,000 to £3,000 and includes:
- Advice
- Administration and application fees (depending on the lender)
- House valuation
- Solicitors fees for providing independent legal advice
By talking to an industry expert like Age Partnership, your initial advice is completely free of charge meaning you only pay if you decide to go ahead.
The amount charged is typically 1.95% of the cash sum you release or a minimum fee of £1,495, which is only payable once your equity release plan is in place.
The benefits of choosing a company like Age Partnership are as follows:
- They compare the whole of the equity release market , not tied to any particular mortgage provider
- They have arranged special rates with lenders that you may not be able to get elsewhere
- They work on your behalf agreeing reduced set-up costs with lenders and where possible cashback payments
- Their initial advice be it over the phone or face to face is completely free
- Your Age Partnership adviser is there to guide you through the whole process
An easier way to compare equity release schemes
If you are considering unlocking the money that is tied up in your home but want to know more about it, you’ll find a wealth of information right here at Over50choices. We can guide you through all aspects of both lifetime mortgage and home reversion plans; from understanding more about the different types of plans available, right through to the pros and cons.
You can also use our equity release comparison table to compare the key features available and read our reviews on leading providers.
What to look for when comparing equity release
If you have started to compare equity release yourself, in addition to the interest rate charged, there are a number of options you may want to consider:
- Are you wanting to take the money in one go or look for a company that offers a draw down option so you can access the cash as and when you need it?
- Would you like to guarantee that some equity is left for family?
- Would you like the flexibility to repay some of the interest on a regular basis so the final loan is lower, or perhaps make repayments as and when you like?
So your comparison shouldn’t just be about money, it should also be about how it the scheme works and the flexibility it offers - which is where a qualified specialist can help.
Getting the best advice
Whether you prefer to speak to Age Partnership over the phone or face to face, the choice is yours. They will talk through your requirements, fully explain how plans work; help you consider whether it’s right for you or if other options are available such as downsizing and provide you with comparisons and a written illustration that you can talk through with your family.
The independent advice you get is free; you only pay of you decide to go ahead and your Age Partnership adviser is there to help and guide you every step of the way - this article could help if you want to find out how much equity you can release.
Answers to your questions