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What does rolled up/compound interest mean?

If the plan that you take out is one where the whole amount of the interest is rolled up, that means that at the end of the first year, the amount of interest charged will be added to the amount you first borrowed. The next year, the interest will be compounded. That means it will be calculated on the sum of your original loan plus the interest that was charged during the first year. The same process will apply the next year and so on, so although the interest rate you are being charged will remain the same each year, it will be calculated on a larger amount each time, because the amount you owe will grow each year.

Interest rates vary and can be as low as about 3% but let’s take a simple example, where the original loan is for £50,000 and the interest rate is 5%:

Year

Loan Interest at 5% Total owed

1

£50,000 £2,500 £52,500

2

£52,500 £2,625

£55,125

3

£55,125

£2,756

£57,881

4

£57,881

£2,894

£60,775

5 £60,775 £3,038

£63,814

 

While it may appear as if the total owed is growing rather fast, it is likely that the value of your property will also be growing. However, this should not be taken for granted. Please see FAQ: How might house prices increase during the life of my equity release plan, for an illustration of how your share of the equity in your property might be affected by house price variations.

Before you apply for an equity release plan you will be given a key facts illustration which sets out the main details about the plan.  Section 8 of the illustration will set out in detail how the total amount of your loan and interest will build up over the years.