Compound Interest Calculator
Easy to use with no personal details required
When you take out an equity release (specifically a lifetime mortgage), the loan charges compound interest.
This interest can build up considerably over the plan’s term, so you must know what to expect.
Equity Release Compound Interest Calculator
| Year | Amount released | Annual Interest | Balance |
|---|
How to use the calculator
Simply enter three key pieces of information:
Amount of equity released: For lump sum lifetime mortgages, this represents the one-time payment you receive at the start of your plan. For drawdown lifetime mortgages, input the total amount you anticipate releasing to estimate the maximum interest accrual.
Number of years: This refers to the duration, or term, of your lifetime mortgage. While it’s impossible to predict this accurately, you can input different terms into the calculator to compare how compound interest affects each scenario.
Interest rate: Enter the interest rate provided by your equity release provider. Some use an annual rate (which our calculator utilises), while others use a monthly rate.
How does compound interest work in equity release?
Unlike typical loans, with equity release, the lender adds interest not only to the original loan amount but also to any interest already accrued.
This means that the total amount owed grows faster than with standard loans over time.
Furthermore, as interest payments are typically deferred during the loan term, the impact of compound interest becomes more pronounced.
However, the exact amount of interest accumulation is within your control, influenced by factors such as the loan size, interest rate (often fixed initially), and loan duration, providing you with a sense of reassurance and control over your financial planning.
We recommend visiting Equity Release Wise for the most current equity release rates.
Example of compound interest on equity release
Let’s consider an example of how compound interest works with equity release.
Suppose someone releases £60,000 of equity from their home using a lifetime mortgage with an interest rate of 5%.
After the first year, the amount owed would be the original £60,000 plus £3,000 in interest, totalling £63,000. By the end of the second year, 5% interest would be charged on the new total, bringing the amount owed to £66,150.
This compounding process continues until the lifetime mortgage is repaid.
The amount owed at the end of the mortgage depends on a few key factors:
- The amount borrowed. Interest is calculated on the equity you’ve released, whether in a lump sum or through multiple drawdowns.
- The interest rate. Most lenders offer fixed rates, but variable rate options are also available.
- Duration of the mortgage. The length of time the mortgage runs will affect the final amount owed, though it’s impossible to predict precisely how long that will be, as it depends on when you move into long-term care or pass away.
How compound interest builds up over ten years
The table below shows how compound interest works over ten years with an equity release interest rate of 5% (for example purposes) on a lump sum of £30,000.
With compound interest, the interest is calculated on the entire loan amount, which includes both the original sum and any interest added since the loan was taken out.
This means the amount owed grows yearly as interest is charged not just on the initial £30,000 but also on any accumulated interest.
| Year | Total loan + interest owed at START of year | 5% AER interest | Total loan + interest owed at END of year |
|---|---|---|---|
| 1 | £30,000 | £1,500 | £31,500 |
| 2 | £31,500 | £1,575 | £33,075 |
| 3 | £33,075 | £1,654 | £34,729 |
| 4 | £34,729 | £1,736 | £36,465 |
| 5 | £36,465 | £1,823 | £38,288 |
| 6 | £38,288 | £1,914 | £40,202 |
| 7 | £40,202 | £2,010 | £42,212 |
| 8 | £42,212 | £2,111 | £44,323 |
| 9 | £44,323 | £2,216 | £46,539 |
| 10 | £46,539 | £2,327 | £48,866 |
How does compound interest impact you?
With a lifetime mortgage, you usually don’t make monthly repayments to cover the loan or interest. This allows the amount you owe to grow considerably each year.
Because of this, equity release can be more costly than other types of loans.
When you move into long-term care or pass away, the total owed might be much larger than the initial loan.
This could significantly affect how much is left after your home is sold—either for your care or as an inheritance for your family. That said, some people might not find this concerning since there are no monthly repayments to worry about.
Find an adviser
Find a qualified and regulated equity release adviser using the Equity Release Council's register.
How much can you release?
You can usually release a minimum of £10,000, but the maximum amount varies based on several factors, such as your property's value and your age.
Typically, the older you are, the more you can release.
Are you looking for a quote?
While we do not provide a quote or call-back service as our website is purely informational, we understand that some people do want an equity release quote.
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To find out how to get the best equity release quote read our guide
