If you’re considering unlocking money from your home through equity release, it’s important to understand how compound interest works—because it has a big impact on the total amount you’ll repay.
In this guide, we’ll explain what compound interest is, how it builds over time with a lifetime mortgage, and how to manage it effectively to protect your estate.
What Is Compound Interest?
Compound interest is interest calculated not just on the original loan, but also on any interest that has already built up. In other words, the amount you owe grows faster over time because each month, interest is charged on an increasing total.
Unlike a standard mortgage, where you make regular repayments to reduce the loan, equity release (via a lifetime mortgage) usually involves no mandatory repayments—which means the interest continues to roll up until the loan is repaid.
An Example of Compound Interest in Action
Let’s say you release £50,000 from your home at an interest rate of 6% per year, and you choose not to make any repayments:
- After 5 years: You owe approximately £67,000
- After 10 years: You owe approximately £89,000
- After 15 years: You owe approximately £118,000
This is because interest is charged on the growing total, not just the original loan.
How Often Is Interest Compounded on Equity Release Plans?
Interest on lifetime mortgages is usually compounded monthly, although some lenders compound it annually. The frequency is outlined in your plan documents and affects how quickly the loan grows.
Can You Reduce the Effect of Compound Interest?
Yes. The vast majority of equity release plans allow you to reduce the total cost of your loan in several ways:
✅ 1. Make Voluntary Interest Payments
Many modern plans offer the option to pay off some or all of the interest each month. Doing this prevents the loan from growing, and keeps the final repayment lower.
✔ You’re in control—there are usually no penalties if you choose not to pay one month.
🔗 Related: Can You Pay Back an Equity Release Mortgage Early?
✅ 2. Use a Drawdown Facility
With a drawdown plan, you don’t borrow the full amount up front. Instead, you access funds in smaller chunks as and when needed.
✔ Interest is only charged on the money you’ve actually taken, not the full amount available—significantly reducing interest over time.
🔗 More details: How Much Equity Can You Release?
✅ 3. Choose a Plan with Repayment Flexibility
✔ The vast majority of plans allow voluntary partial repayments towards the loan itself—helping reduce both the loan and interest as it accrues.
✔ You can often pay up to 10% of the original loan each year without penalty.
🔗 Related: What Are the Pros and Cons of Equity Release?
Does Compound Interest Mean I Could Owe More Than My Home Is Worth?
No. If you choose a lender that’s a member of the Equity Release Council, your plan will come with a no-negative equity guarantee.
✔ This ensures that you’ll never owe more than your home is worth, even if interest grows and property prices fall.
🔗 More details: What Are the Risks of Equity Release?
FAQs: Compound Interest and Equity Release
Can I switch to a plan with lower interest later?
Possibly. If rates fall, or your health/lifestyle changes, you may be eligible to remortgage your equity release plan. An adviser can help you explore this.
What’s the difference between compound and simple interest?
With simple interest, you’re only charged interest on the original loan. With compound interest, you’re charged interest on both the loan and accumulated interest—so the debt grows faster if left untouched.
How can I check what I’ll owe in future?
Use our Equity Release Calculator and ask your adviser for a personalised breakdown of projected interest over time.
Next Steps
Understanding compound interest is a crucial part of equity release. To explore how much you could borrow—and how to manage interest effectively:
✔ Get your personalised estimate with our Equity Release Calculator
✔ Speak to an expert on our Equity Release Adviser page
✔ Keep reading:
- What is an Equity Release Mortgage?
- How Does Equity Release Work?
