Equity Release Compound Interest & How Does it Work?

If you are considering equity release but are confused about equity release compound interest and how it works, then talk to your team at Equity Release Warehouse.

Equity release is a type of mortgage that’s usually exclusive for those aged over 55 years old. If you are looking to release some money from your home, then equity release is for you.

Lots of people aged 55 or over might be struggling for money, especially if they are retired. However, this age group are also more likely to have houses than any other age group.

This is why a lot of people choose to release money from their home, so that not all of their money is tied up in their property.

You can take the money that you have released from your home and spend it however you want. Some people choose to gift it to their loved ones, particularly their grandchildren.

They might choose to release money from their home and pay off any University fees or help to put some money towards a house deposit.

There are a few different types of equity release schemes, including lifetime mortgages and home reversion plans. Both plans are fully protected, meaning that they benefit from a no negative equity guarantee.

The key thing to remember about an equity release plan is that you do not have to repay the loan until after you either pass away or move into a care home after poor health.

When this happens, your loved ones will be responsible for selling your property. However, they won’t receive any proceeds from the sale of the house. Instead, the money from the sale of your property will pay off the loan [1].

As most properties increase in value over time, the sale of the house almost always covers the cost of the loan, which means that your loved ones are not responsible for paying off any of the loan themselves.

Even if the value of the property upon its sale no longer covers the cost of the loan, your bank and equity release provider will be responsible for paying off the difference, not your loved ones [1].

Another key factor to consider with equity release is that, like with any loan, you will be charged interest. As all equity release loans last until you pass away or move into a care home, you will be charged interest on your loan for a number of years.

This means that you will be charged compound interest. If you want more information on equity release compound interest and how it works, then talk to our team at Equity Release Warehouse.

Please call our 24-Hour Helpline: 0330 058 1579

Equity Release Compound Interest and How It Works

Equity release compound interest and how it works is incredibly important to understand if you want to consider equity release.

Compound interest is the interest on your initial loan and the accumulated interest you are charged as the loan goes on. Essentially, with compound interest, you are being charged interest upon interest.

This means that your overall loan amount (the money that you have to repay at the end of your loan) will grow at a quicker and more accelerated rate. The longer the loan goes on, the more interest and compound interest will grow.

Depending on the terms of your equity release loan, the interest can be charged on a daily, monthly or annually rate and schedule.

This means that whatever schedule you opt for, the amount of interest you are charged will gain momentum as each year goes on.

This will significantly increase the amount of loan you have to repay from the sale of your house, which should always be considered when considering an equity release loan.

If you want more information on equity release compound interest and how it works, then talk to our team at Equity Release Warehouse.

Please call our 24-Hour Helpline: 0330 058 1579

Equity Release Compound Interest and How It Works – How to Reduce the Overall Loan Amount

Luckily, there are a number of different things that you can do to reduce the overall loan amount and interest charged on a lifetime mortgage. Some of these options are explored further below.

1. Drawdown plan

One technique to limit the amount of interest you are charged on your lifetime mortgage and equity release plan is to opt for a drawdown plan.

This is when you opt to receive your equity release loan through a number of smaller payments, rather than one large lump sum.

With a drawdown plan, you can opt to receive one large loan amount now, and then a number of smaller payments each month or even each year.

Essentially, you are creating yourself your very own cash reserve pot to draw down from whenever you want or need to. By doing this, you will be charged significantly less interest on your loan and less compound interest will build up.

Please call our 24-Hour Helpline: 0330 058 1579

2. Voluntary repayment plan

Whilst you do not have to repay your loan until you pass away, some people choose to repay some of their loan early so that the overall loan amount is reduced, as will the compound interest.

Whilst you cannot repay a huge amount early, you can choose to repay up to 10% – 15% of the original loan borrowed. You can opt to do this in one large lump sum, or through a number of smaller repayments [2].

Some people who come into some more money, such as inheritance might opt to do this.

This will help to reduce the overall loan amount, meaning that when you come to sell your house and repay the equity release loan, there might be some money left over to go to your next of kin as inheritance.

3. An interest-only plan

Another way to reduce the amount of compound interest you are charged is to opt for an interest-only plan. With this type of plan, the outstanding balance will always stay the same, and won’t grow. However, you are required to make monthly repayments to pay off the interest on your loan through interest-only payments [3].

Whilst you will have to repay the interest on your loan on a frequent basis, you won’t be tied down to paying them every month, as there is more flexibility with these types of repayments.

If you want more information on equity release compound interest and how it works, then talk to our team at Equity Release Warehouse.

Please call our 24-Hour Helpline: 0330 058 1579

What other costs are there?

There are a number of other costs associated with taking out an equity release plan. This includes costs such as advice fees, valuation fees, tax, repayment fees and even application fees.

Depending on what type of plan you opt for and how much your house is valued at, this could set you back a few thousand pounds.

Some lenders ask you to pay these fees upfront, whereas others might allow you to pay them off once your application has been successful or your money has been released to you.

As you can see, opting for equity release can be incredibly expensive when you consider any upfront costs and the amount of interest and compound interest you are charged.

This is why it is always important to seek professional advice from an equity release adviser before applying, so that you are confident that you can definitely afford it.

If you want more information on equity release compound interest and how it works, then talk to our team at Equity Release Warehouse.

Please call our 24-Hour Helpline: 0330 058 1579

Talk to our Team about Equity Release Compound Interest and How It Works

If you are confused about equity release compound interest and how it works, then talk to a member of the team at Equity Release Warehouse. Our team is happy to talk to anyone about compound interest, and our initial advice is entirely free. Start your equity release journey today by calling us on 0330 058 1579.

References

[1] https://nationaldebtline.org/fact-sheet-library/equity-release-ew/

[2] https://www.moneysavingexpert.com/mortgages/switch-equity-release-deal/

[3] https://nationaldebtline.org/fact-sheet-library/equity-release-ew/