How Does Equity Release Interest Work?

Understanding compound interest

Unless you have a Payment Term or Interest Reward lifetime mortgage, or you wish to make voluntary payments to better manage your cost of borrowing, there are typically no repayments to make with a lifetime mortgage until the plan comes to end.

That's because the loan, plus roll-up interest, is usually repaid through the sale of the property when the last remaining applicant passes away or moves into long term-care. As a result, a lifetime mortgage is subject to compound interest.

This means interest is first charged on the amount you borrow. After that, each month (or year, depending on your plan), the interest is added to your loan balance, including any previous interest. This means you start paying interest on interest, causing the total amount you owe to grow over time. This continues until the loan is repaid, so the balance can increase quickly.

Things to consider

Alongside the benefits of equity release, we also want you to be aware of what’s important to consider before making a decision.

Lifetime mortgages and Payment Term lifetime mortgages are loans secured against your home and are subject to compound interest, meaning the amount you owe can grow quickly
There’s a period of mandatory payments with a Flexi Payment Term Lifetime Mortgage, and your home may be repossessed if you don't keep up with these payments
Equity release may leave you with limited or no property equity remaining and will reduce your financial options in the future
Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits
These are long-term financial products and are not designed to be repaid early. If you do, early repayment charges may apply

How can I reduce my cost of borrowing?

You do, of course, have options to help reduce the total cost of the loan over the lifetime of your plan if that’s important to you; for instance, if you wish to leave a larger estate to your loved ones. These include:

Make repayments

All our plans come with the option to make ad-hoc or regular repayments to help reduce your total cost of borrowing. Usually, you can only repay a portion of your initial loan (10-12% depending on your plan) within each 12-month period without incurring an early repayment charge (ERC). That's until your ERC period ends.

Alongside helping you manage your borrowing costs, some of our plans reward you for making payments, such as our Payment Term or Interest Reward lifetime mortgages.

Our Flexi Payment Term Lifetime Mortgage (PTLM) - available to homeowners aged 55-63 - requires you to make mandatory payments until the oldest applicant turns 66. In return, you may be able to release more money from your home versus a comparable lifetime mortgage. With our PTLM, your home is at risk of repossession if you fail to keep up with payments.

Alternatively, our Apex Interest Reward Lifetime Mortgage - available to homeowners aged 55-84 - rewards you with an interest rate discount of up to 0.75% for committing to make payments for 15 years. You'll always retain full ownership of your home with our Apex Interest Reward plan, even if you stop making payments early. However, you may lose your interest rate discount if you end your payment term before 15 years.

Even if neither our Payment Term or Interest Reward Lifetime Mortgage is right for you, if you’re able to make repayments towards a regular lifetime mortgage it’ll help reduce the amount of interest you pay over the lifetime of your loan.

Learn more about making repayments

Consider a drawdown plan

With a drawdown lifetime mortgage, you only take out the money you need when you need it. This can help reduce your total cost of borrowing, as interest is only charged on the money you release, rather than the full amount available.

It's worth noting, however, that drawdowns aren''t guaranteed. If you choose to make a drawdown, the funds will be at the prevailing fixed interest rate at the time. This new rate may differ from your original interest rate.

Learn more about drawdowns

Remortgage to another equity release plan in the future

If interest rates reduce in the future, you may have the option to remortgage your current plan to secure a lower rate. By paying a lower interest rate, you can reduce your total cost of borrowing. However, a reduction to interest rates in the future isn’t guaranteed.

It’s also important to remember that there may be an early repayment charge (ERC) payable if you choose to remortgage your equity release plan. However, most modern lifetime mortgages come with fixed ERCs.

At more2life, all our plans come with none or fixed ERCs, meaning they expire after a certain amount of time. Your adviser can explain this in more detail to you.

Getting the right advice

To take out a lifetime mortgage, you ﬁrst need to receive advice from a qualiﬁed equity release adviser who’ll look at your options and help you make an informed decision.

If you’re yet to ﬁnd an equity release adviser, we recommend searching the Equity Release Council's database of registered equity release adviser members. All Equity Release Council members have agreed to abide by Equity Release Council rules, guidance and standards, and have signed up to the Council's Statement of Principles.

Find an adviser