How much does it cost?

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%:


Loan Interest at 5% Total owed


£50,000 £2,500 £52,500


£52,500 £2,625










5 £60,775 £3,038



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.

Why are the interest rates on equity release loans higher than on standard mortgages?

In recent years, interest rates have been at historically low levels. However, people sometimes ask why interest rates on equity release products appear to be higher than standard mortgages.  Equity release loans and reversions are different from the mortgages which people take out to buy their homes – and different factors need to be taken into account when the providers work out how much they need to charge.

With a standard mortgage, you are making regular payments to the lender – typically every month. A standard mortgage is always for a fixed period of time which is quite different from LTMs. With an “interest-only” mortgage you are only repaying interest on the loan which you took out – and at some point you will have to repay the lender the full amount of the capital (the original loan) borrowed.  With a “repayment” or “capital repayment” mortgage, you are repaying a small amount of the actual loan (capital) each time, combined with interest on the whole loan.  Your aim is – eventually – to repay all the money which you borrowed by the end of the period of your mortgage (e.g. 10years), so that you end up owning your property outright.

Equity release is designed to help older customers who either already own their property outright, or have relatively small mortgages left to pay. They may decide to “release equity” in their property – that is, take out a loan or sell part of the value of the property – knowing that they will not actually pay that money back to the lender (or reversion provider, in the case of a home reversion plan). The loan or reversion sum will be repaid at a future date, when the property is sold. That means that the provider’s money is potentially tied up for an unknown number of years, during which time the provider will not be receiving any payments from you (unlike with a standard mortgage, where the provider will be receiving regular monthly payments). Additionally, the protections that are in place to manage the contract – i.e. security of tenure, and no negative equity guarantee cost the provider firm (lender) significant funds to set up and maintain. So the cost to the provider of making the equity loan, or buying part of the equity in your property, is more expensive than it is for a standard mortgage lender – and that’s why the interest rate is also higher.

How might house prices increase during the life of my equity release plan?

It’s difficult to anticipate how house prices might rise or fall over a long period of time. The Office for National Statistics UK House Price Index shows that national house prices have risen by an average of 5.9% per year from 1991 to 2018 but there may be big regional variations where you live.

Below is an example based on house price growth of 4% and an interest rate of 5% on the equity release loan. The example is based on a plan where all the equity is released together and interest begins to grow from day one.

Year of loan

House price Loan size Equity left (£) Equity left (%)




£185,000 74%

After 5 years





After 10 years £355,825 £105,878 £249,947


Any increase in house prices would increase the total value of the property and therefore increase the amount of equity left. Any decrease in house prices will have the reverse effect and reduce the amount of equity remaining.

To help provide certainty and security both now and in the future, all customers of plans that meet Equity Release Council standards benefit from a No Negative Equity Guarantee. This means you or your estate will never have to repay more than the property is worth, even if the total amount of the loan plus the interest owed exceeds this amount.

What is the cost of setting up an equity release plan?

Under the terms of your Lifetime Mortgage, the rate of interest that will be charged on your loan will either be fixed, or it will be variable, in which case there will be a “cap” (upper limit) on the amount that can be charged at any time.  If the rate is fixed, it will be fixed each time you withdraw funds from your plan.  Over time, therefore, you could have several amounts of money which you have released at different times, and each would be subject to a different fixed rate of interest, which would then be added to the total amount which you have borrowed. You will not have to pay back any of this money until your plan comes to an end and your property is sold or you choose to repay the loan.  At the time you take out the plan you may however be asked to pay a number of other fees to cover the costs of setting up the plan.  They will include fees payable to:

  • The Provider which is financing your plan.  These may be described as “application” or “administration” fees;
  • Your Adviser, who will carry out detailed research into the options and recommend the most suitable plan from the range available, followed with a written report containing recommendations and a personalised Key Facts Illustration (KFI). Should you wish to proceed, your adviser will arrange all of the required paperwork with the provider and handle things through to eventual completion and release of the funds;
  • Your Solicitor, for giving you independent advice on the plan to help you understand how it will work, and for carrying out the necessary conveyancing (legal) work; and
  • The surveyor (valuer) who will inspect your property in order to give the provider an independent estimate of its value at the time you take out the plan.

Some firms may not charge fees in all of these categories and others may structure their plans so that they offer cash-backs in order to balance the cost for you.  You will need to research the market thoroughly to ensure that you find an option which suits you.  The level of fees may also vary between firms, clients will always incur own solicitor costs, but some adviser firms don’t charge any fee and neither do some providers.