Equity Release Compound Interest Calculator
February 2025
Estimate How Interest Will Accumulate on Your Lifetime Mortgage
Use our equity release compound interest calculator to see how much interest could build up over time on a lifetime mortgage. The calculator is interactive, so you can test different scenarios and understand the potential cost of compound interest under various conditions.
How to Use the Calculator
To get started, enter these three key details:
- Equity Release Amount – If you’re taking a lump sum lifetime mortgage, this is the one-time payment you’ll receive. If you’re considering a drawdown lifetime mortgage, enter the total amount you expect to release.
- Number of Years – Since lifetime mortgages run until you pass away or move into long-term care, it’s impossible to predict the exact term. Try different timeframes to compare how interest builds over shorter or longer periods.
- Interest Rate – Enter the rate offered by your equity release provider. Our calculator works with annual rates, but some lenders may use monthly rates.
Equity Release Compound Interest Calculator
| Year | Amount released | Annual Interest | Balance |
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Note: This calculator is for illustrative purposes only. Lenders may have different ways of calculating and applying interest.
Understanding Compound Interest on Equity Release
What Is Compound Interest on Equity Release?
If you’re exploring equity release, you’ve probably heard of compound interest. Unlike a standard residential mortgage, where interest is charged only on the original loan amount, equity release interest compounds over time—meaning you pay interest on the loan and the accumulated interest.
How Is Equity Release Compound Interest Calculated?
Equity release interest builds up faster than a traditional mortgage because you typically don’t make monthly repayments. Instead, interest is added to the loan over time, and the total amount owed continues to grow.
The main factors that influence how much interest accumulates are:
- The amount borrowed – Whether taken as a lump sum or in drawdown stages.
- The interest rate – Most equity release plans have a fixed rate, though some offer variable rates.
- The length of the loan – The longer the plan runs, the more interest will build up.
Will Rising Property Values Offset Compound Interest?
One way to assess the long-term impact of compound interest is to consider the potential increase in your property’s value.
For example, if after 20 years, the calculator shows that you owe £80,000, but your home is currently worth £250,000, you would still have £170,000 in remaining equity. However, if property values rise, your home could be worth much more by the time the loan is repaid.
According to ONS data, the average UK house price rose 13.6% in a single year (2022), showing how property appreciation can help offset some of the interest costs.
How Lenders Set Equity Release Interest Rates
Equity release providers base their interest rates on gilt yields (returns on government bonds) and potential property market changes. Because of this, rates fluctuate, but once you take out a fixed-rate lifetime mortgage, your interest rate stays the same for the duration of your plan.
Can You Get Equity Release Without Compound Interest?
Yes, there are ways to avoid or reduce compound interest on equity release:
- Choose an Interest-Only Lifetime Mortgage
This type of plan lets you pay the interest each month, preventing it from compounding. The amount you owe remains the same throughout the loan term, and only the original loan amount needs to be repaid when the plan ends.
Some plans allow you to stop making payments at any time. However, once you stop, the loan will work like a standard lifetime mortgage, with compound interest applying from that point onward.
- Consider a Home Reversion Plan
A home reversion plan allows you to sell part or all of your home to an equity release provider in exchange for a lump sum. You can continue living in your home rent-free, and there is no compound interest—but the amount you receive will be much lower than the market value (typically 30-60%).
How Does Compound Interest Affect You?
Because most lifetime mortgage plans do not require monthly repayments, the total amount owed can grow significantly over time.
For example:
- Year 1: You borrow £75,000 at 5% interest → Interest added: £3,750 → Total owed: £78,750
- Year 2: Interest applied to £78,750 → New total: £82,687.50
- Year 3: Interest applied to £82,687.50 → New total: £86,821.88
This continues until the loan is repaid when your home is sold.
How to Reduce Compound Interest on Equity Release
If you’re concerned about the long-term impact of compound interest, here are some ways to reduce the amount owed:
- Choose a Drawdown Lifetime Mortgage
With this type of plan, you only pay interest on the money you withdraw, rather than the full amount available to you. This can significantly slow down the growth of interest over time.
- Make Partial Repayments
Many lenders allow you to repay up to 10% of the loan annually without penalties. This can help reduce the impact of interest buildup and lower the total amount owed at the end of the plan.
- Pay Off Some or All of the Interest Monthly
Some lifetime mortgages let you make voluntary interest payments each month, either reducing or completely stopping the accumulation of compound interest. If you choose to pay the full interest each month, your loan balance will remain unchanged.