Equity release compound interest calculator - how does it work?

Updated 24th August 2023

One important factor to consider when taking out a lifetime mortgage, which is the most popular type of equity release loan is the compound interest. Compound interest means that interest is charged not just on the initial loan amount, but also on any interest that has already been added to the loan. Over time, this can add up to a significant amount.

In this article we discuss what compound interest is and explain how it works.  We also show you how interest accumulates with our equity release compound interest calculator.

How is compound interest calculated on equity release?

Compound interest is calculated when you are charged interest on the loan and on the interest already accrued. This differs from a standard mortgage where you are just charged interest on the original loan. Because you are paying interest on the loan and the interest, your overall debt will grow at a quicker rate. Our compound interest calculator below will show you how it works.

How to use the equity release compound interest calculator

You can use the calculator in 2 ways:

  1. When considering a new plan: to calculate how much interest will roll up over a chosen number of years
  2. When you have an existing plan: to see how much interest you could save when making a lump sum repayment

In 3 simple steps you will see your results; enter the amount of cash you are considering releasing (new plan) or the lump sum repayment you wish to repay (existing plan) and then move the interest rate slider to the rate you will pay. Finally, add the number of years you believe the loan could be in place.


Please note that this is a compound interest calculator and not an equity release calculator that shows you how much you could borrow.

As an equity release mortgage is for life there is no fixed term, therefore you won’t know how many years it will be in place. However, the compound interest calculator will give you a better understanding of how much you could pay perhaps over 5, 10, 15 or even 20 years.

Do keep in mind though that although your lifetime mortgage will be growing, hopefully so will the value of your property and therefore the amount of equity available to you. According to the Land Registry Price Index , the average UK house price in January 2000 was £84,620, compared to £294,329 in December 2022.

See how much cash you could release

Now you understand more about how the compound interest works on a lifetime mortgage, you can see how much cash you can release with our calculator.

It's easy to use and shows you in seconds how much cash you could release from your home. The actual amount however will depend on your personal circumstances including the age of the youngest borrower and the value of your property.

When you use the calculator there is no obligation to proceed and there are no credit checks so your credit score will not be affected. Alternatively you can will find further calculators on most broker and provider websites.

Try the calculator today


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Here are your results

You could release up to

What happens next?

  • A guide has been emailed to you
  • A member of the Age friendly UK team may call you just to touch base & help with any questions
  • Don't worry - you are under no obligation & any advice is free

How compounded interest could affect your equity

The following example shows how compound interest and property values could impact your loan and the equity left in your property.

A property is worth £250,000
A typcial tax free cash released from property £50,000
*Assuming a 6% rate of interest the loan will have grown in 20 years to £165,510
Average property increase according to Government House Price Index £796,000
 Potential amount of cash equity left to beneficiaries £630,490

Based on historic average rates of growth, the value of the property has increased sufficiently to leave a substantial amount of inheritance, even after taking into account the lifetime mortgage. Please note that over time inflation will impact the true value of any surplus cash.

*as of today 5th April 2023 rates start from around 6%.

Can an equity release compound interest calculator help me compare different plans?

Yes, an equity release compound interest calculator can be a useful tool to compare different lifetime mortgages. By inputting the initial loan amount, interest rate, and the term of the loan, you can compare the total amount that will need to be repaid for each plan. See our equity release interest rates article for the latest rates.

Can I reduce the affects of compounding interest?

Yes, some plans allow you to make monthly repayments against some or all of the interest and it’s now an ERC requirement that all plans must allow customers to make penalty free partial repayments against their loan. These are typically limited to a maximum amount each year, usually around 10%, but each plan will be different.

For example, in our table above, repaying £5,000 on a £50,000 loan with a 6% interest rate could save you £11,551 in rolled up interest (£16,551 including the £5000 repayment amount) over 20 years.

If funds allow, repaying some of the loan could be worth considering if you want to keep the overall cost of your loan down.

Alternatively, you could opt for a drawdown lifetime mortgage that will allow you to "drawdown" a cash sum today and hold additional funds in reserve until needed. This will reduce the amount of compound interest payable as you only accrue interest on the money you have drawndown.

Next steps

Equity release can be a useful financial product for those looking to release the equity from their homes in retirement. However, it is important to understand the impact of compound interest on the loan and the total amount that will need to be repaid.

By using an equity release compound interest calculator, you can get a better understanding of the total amount that will need to be repaid and make an informed decision about whether a lifetime mortgage is right for you.

You can then check to see how much cash you could release from your home, by using our equity release calculator or speak to an equity release specialist if you want to receive free advice before deciding to proceed.



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