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How does compound interest work?
Unless you choose to do so, there are no repayments to make on a lifetime mortgage until the plan comes to an end. As a result, you pay interest not only on the loan itself, but also on the interest that’s already been added to the loan. But there are ways you could reduce the total cost of borrowing of your lifetime mortgage which we outline in this guide.
Whether interest is added to your lifetime mortgage on a monthly or annual basis is dependent on your plan. But during that first period, the interest is charged and added to the original loan amount - the sum of tax-free cash you unlock from your home’s value.
An example of how compound interest accrues over 15 years
| Product | Balance at the start of the year | MER¹ | Interest added² | Balance at the end of the year³ |
|---|---|---|---|---|
| Year 1 | £81,703 | 6.74% | £5,681 | £87,384 |
| Year 2 | £87,384 | 6.74% | £6,075 | £93,459 |
| Year 3 | £93,459 | 6.74% | £6,497 | £99,956 |
| Year 15⁴ | £209,360 | 6.74% | £14,555 | £223,915 |
Initial release amount of £81,703. Plan subject to a fixed interest rate of 6.74% MER (Monthly Equivalent Rate).
¹ With all Key lifetime mortgages, the interest rate is fixed throughout the life of the plan
² Interest is charged on balance as at the start of the year, not the original amount
³ The balance at the end of the year including compound interest
⁴ This cycle continues throughout the life of the plan
¹ With all Key lifetime mortgages, the interest rate is fixed throughout the life of the plan
² Interest is charged on balance as at the start of the year, not the original amount
³ The balance at the end of the year including compound interest
⁴ This cycle continues throughout the life of the plan
Making repayments
Even though there are typically no monthly repayments to make with a lifetime mortgage, all our plans come with the option to make ad-hoc or regular repayments to help reduce your total cost of borrowing.
Even if you’re only able to make small repayments, it will help reduce the amount of interest you pay over the lifetime of your loan.
ⓘ Illustrative example
In this example, if you were to borrow £81,703, with a fixed 6.74% MER interest rate, and make no repayments at all, after 15 years, your total cost of borrowing would be £223,915. However, by making a monthly £250 repayment, after 15 years, you’d owe £146,440 - with a total cost of borrowing, including repayments, of £191,440. This means, by repaying £250 a month, you, and your beneficiaries, could benefit from a £32,475 net interest saving.
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.
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.
More on lump sum vs drawdown lifetime mortgage
How could a drawdown lifetime mortgage reduce my cost of borrowing?
As you only pay interest on the funds you release, you could potentially save thousands over the course of your plan with a drawdown lifetime mortgage. Here's an example to help you understand how this could work for you.
ⓘ Illustrative example
This example is for illustrative purposes only and shows there are two customers who both have access to a lifetime mortgage facility of £81,703 at an interest rate of 6.74% (future drawdowns will be charged at the prevailing interest rate) - Key Market Monitor Q1, 2023.
Customer B saves £32,851 in interest charges
While Customer B still borrows the same £81,703 over 15 years, because they take their money in stages, their total cost of borrowing is lower as interest is only charged when they release their funds. As a result, Customer B saves almost £32,851 in interest charges over the total life of their plan. This example is over 15 years but it could be longer or shorter.
Am I eligible for a lifetime mortgage?
If you're thinking about releasing equity from your home, it's important to find out if you could be eligible.
You can check this by using our free online calculator.
To take out a lifetime mortgage with Key, you must be a UK homeowner:
- Aged 55+ (including all joint applicants)
- With a property worth £70,000+
Lifetime mortgage benefits
Your specialist equity release adviser will explain:
Potential drawbacks
Your equity release adviser will also outline the following important things to think about:
Equity release helps thousands of homeowners across the UK take control of their finances, so that they can live the later life that they deserve.
Explore how Key could help you put the life in later life.
Request your free, comprehensive guide today.
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Back to "What's in this guide?"
If you’re looking for ways to release funds from your home, you may be wondering “is equity release the same as a lifetime mortgage?” A lifetime mortgage is one of two types of equity release, allowing you to free up tax-free funds in later life. The other type of equity release is a home reversion, which Key don't offer.
The other type of equity release is a home reversion plan, which involves selling all or part of your home to a provider in exchange for a lump sum. We offer lifetime mortgages only, allowing you to keep full ownership of your home.
A key benefit of lifetime mortgages is that you retain full ownership and can continue living there for as long as you like.
A lifetime mortgage is a loan secured against your home. Usually, when you or the last remainng applicant pass away or move into long-term care, your home will be sold to repay the loan. Any remaining funds from the sale will be passed on to you or your nominated beneficiaries.
We're proud members of the Equity Release Council and provide lifetime mortgages that meet their standards, including the No Negative Equity Guarantee. This is an important protection which ensures you'll never owe more than the value of your home when your plan comes to an end.
This means there's no risk that you'll pass on debt accrued through equity release to your loved ones. In the unlikely event that your home decreases in value enough to leave a shortfall between the sale proceeds and the amount you owe, the no negative equity guarantee writes off the remainder of your loan.If you currently receive or are eligible to claim means-tested benefits, taking out a lifetime mortgage may affect your eligibility as it will change your financial situation. Our advisers can review your current position and discuss your options moving forward including how a lifetime mortgage may affect any benefits you receive.
You may wish to repay some of your lifetime mortgage early and reduce the size of the loan you accrue interest on. Subject to criteria, we may be able to help you personalise your plan with the option of making ad-hoc repayments of up to 10%-12% of the initial amount you've borrowed each year.
Additional repayments, including repaying in full, may incur early repayment charges. Your adviser will explain these terms clearly so you know what your options are.Things to consider
- All our equity release advice relates to Key lifetime mortgages only - a loan secured against your home
- The loan, plus compound interest, is typically repaid through the sale of the property when the last remaining applicant passes away or moves into long-term care
- £899 advice fee only payable on completion
Read our equity release articles
Equity release isn't something you should rush into. Read our RetireWise articles to learn more about how it works and whether it's right for you.
Page last updated: Friday 22 September 2023