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Compound interest explained

  • You pay interest on the loan plus the interest that’s already been added to the loan
  • You could make monthly repayments to manage your total cost of borrowing
  • Find out more about the benefits, drawbacks and costs of equity release

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. 

  • In the period following, interest is then calculated and charged on what you owe (the original loan amount plus interest), not the amount you initially borrowed
  • This new, larger amount of interest is then added to your loan, and this cycle continues until the plan comes to an end
  • This means a larger amount of interest is added to your lifetime mortgage each period
  • The interest rate at the beginning of your plan determines how quickly the interest grows which will impact the total cost of borrowing over the term of the loan

ⓘ Illustrative example

Illustrative purposes only. It uses the average release amount of £82,475 and monthly equivalent rate (MER) of 6.3% – Key Market Monitor H1, 2023. Average UK house price of £288,000 – ONS, August 2023.

 
Year Balance at start of year Interest (6.3% MER)¹ Balance at end of year² Remaining property equity³
1 £82,475 £5,349 £87,824 £200,176
2 £87,824 £5,695 £93,519 £194,481
3 £93,519 £6,065 £99,584 £188,416
15 £198,778 £12,891 £211,669 £76,331
20 £272,153 £17,649 £289,802* £0


* The end of year balance is higher than the property's value. You'll never owe more than your home's worth, though, with a Key lifetime mortgage. This is the no negative equity guarantee.

¹ The rate at which interest adds to the loan – in this case, monthly (MER). All Key lifetime mortgages have a fixed interest rate for life. This column shows how much interest has added to the loan that year.
² How much is owed at the end of the year, including compound interest.
³ The difference between your property value and your outstanding lifetime mortgage balance.

How can I reduce the cost of my lifetime mortgage?

All of Key’s lifetime mortgages come with features which could help to reduce the total cost of the borrowing if that’s important to you; for instance, if you wish to leave a larger inheritance to your loved ones.
 

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.

  • By paying a lower interest rate, you can reduce your total cost of borrowing. However, a reduction in interest rates in the future isn’t guaranteed.
  • It’s also important to remember that an early repayment charge (ERC) may be payable if you choose to remortgage your equity release plan. 
  • However, all our plans come with fixed ERCs, meaning they expire after a certain amount of time. Your Key equity release adviser can explain this in more detail to you.

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 that a drawdown facility is not guaranteed as the lender has the right to withdraw it.

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 A

Customer A decides to take all their cash in one go through a lump sum lifetime mortgage, so interest is charged on the full release amount from day one.



(Orange bar)

Customer B

Customer B, meanwhile, takes an initial loan of £51,703 to meet their immediate requirements, so interest is only charged on this lower release amount. Customer B then decides to make two further £15,000 drawdowns over time, taking their total release amount to £81,703.

(Blue bar)

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.

What are the benefits and drawbacks of equity release?

Watch our video to learn more about the benefits and drawbacks of equity release and see if it could be right for you.

Our equity release advice relates to Key's range of lifetime mortgages only - loans secured against your home.

Video transcript (pdf)

 

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+

Why choose Key as your equity release adviser?

It's a regulatory requirement for anyone considering equity release to get specialist advice before taking out a lifetime mortgage. So why should you choose Key as your equity release company?

We're regulated experts

Key is regulated and a proud member of the Equity Release Council
 

Trusted award-winners

We've won 80+ awards and 17,000+ excellent Trustpilot reviews, making us the UK's most trusted equity-release specialist

BestEquityReleaseAdviser2022-(1).png

Highly experienced

We have over 25 years' experience in helping more than a million over-55s with tailored equity release advice on later-life products. Our knowledge means that, once we've taken the time to understand your needs, we’ll have a sound idea of what the right plan is for you.

Customer stories

 

ⓘ Did you know...

Over the years, more than a million customers have benefitted from our expert advice, experience and professionalism from Key. We've been rated 'Excellent' on Trustpilot and you can check out the great things our customers have to say about our equity release plans.

John's story

69, Retired

“I sat down with the adviser and he went through every single detail and concerns, plus a lot more which I didn’t know about. They took care of everything… it’s so uncomplicated… the process is so easy.”

Read more on John's experience

Watch more of our customer stories

Next steps to release equity from your home

Use our free calculator

Check your eligibility and how much cash you could release with our equity release calculator.

Speak to an adviser

Book an appointment with a qualified equity release adviser at a time that's good for you.

Is equity release right for me?

Download your free, comprehensive guide today to see if equity release is right for you.

Your other options with Key
If another product is more suitable, we'll refer you to a different adviser within Key Group to help. If you go ahead, you'll only be charged the same £1,299 advice fee you'd pay with us, even if their fee is usually higher. Key offers alternatives to equity release such as a retirement interest-only mortgage or retirement repayment mortgage.

Other options to think about
It's important to know your other options before going ahead with equity release. These include: downsizing, unsecured lending, using existing assets, or support from friends or family.

Lifetime mortgage FAQs

When it comes to releasing equity from your home, we understand that you may have questions too. To help, we have compiled the answers to the questions we get asked the most. If you are still unable to find the information you're after, we are just a phone call away.

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 plan, which Key don't offer. This 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 estate.

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
  • Our fixed advice fee of £1,299 is 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.

How does equity release work?

 

How long does equity release take?

Is equity release safe?

Page last updated: Wednesday 11 September 2024