Equity Release plans are a significant financial decision, particularly when it comes to understanding the interest involved. If you’re wondering “what interest do you pay on Equity Release?” and how it works here are the key aspects that shape how the interest on these plans accumulates.
The “roll up” of interest explained
- The principal of ‘rolling up’ interest in Equity Release is similar to the concept of compound interest in savings accounts. It starts with the initial amount you borrow, often including any administrative fees. This is your ‘principal amount’.
- Interest is calculated on this principal and added to it, then recalculated on the new total for each interest charging period. This means the total you owe grows progressively over time, with each period adding more interest than the last.
Fixed interest rates and future predictions
- The interest rate on your Equity Release plan is fixed, providing you with a reliable forecast of how much you will owe in the future. This predictability is a key feature when considering an Equity Release.
Charging periods: monthly or annually
- Equity Release providers might calculate interest either monthly or annually. Even with the same interest rate, the amount owed can vary between providers based on their chosen charging period. To compare plans fairly, you might see two interest rates in your illustration: MER (Monthly Equivalent Rate) and APR (Annual Percentage Rate). MER is typically slightly lower than APR.
All Equity Release illustrations follow the same format, so it is section 8 that will show the MER and the effect the roll up of interest would have on your plan. Here is an example of a plan for someone who took £64950 at an interest rate of 5.79% fixed for life.
What you will owe and when
Projection of rolled up interest.
This section shows how the amount paid to you and the interest and any fees that we charge mount up over 5 years. It has been calculated using an interest rate of 5.79% (MER). Interest is added to the amount you owe monthly.
Remember, the mortgage could run for a longer or shorter time than 5 years, and if it runs longer, the amount you owe, will carry on increasing.
| Year | Balance at start of year £ | Interest charged | Estimated fees charged during the year £ | What you owe at the end of the year £ |
|---|---|---|---|---|
| 1 | 64 950.00 | 3 851.20 | 0.00 | 68 801.20 |
| 2 | 68 801.20 | 4 091.02 | 0.00 | 72 892.22 |
| 3 | 72 892.22 | 4 334.28 | 0.00 | 77 226.50 |
| 4 | 77 226.50 | 4 592.00 | 0.00 | 81 818.50 |
| 5 | 81 818.50 | 4 865.05 | 0.00 | 86 683.55 |
Later in the same illustration, in section 15, there will be details of the APR. This is the figure you should use when comparing products. As you can see, the MER is shown as 5.72%, but the overall cost for comparison is 6.2%
| The total amount you would pay back over the example term of 5 years including the amount borrowed: | 86 683.55 |
| The overall cost for comparison is: | 6.2% APR |
Managing your plan with payments
- Most plans allow regular or ad hoc payments, offering control over how quickly interest accumulates. These payments can slow down the ‘roll-up’ speed, allowing you to manage your plan flexibly — you can decide the amount and frequency of these payments.
Key considerations before proceeding
Choosing an Equity Release plan involves various factors, with the interest rate and its calculation method being crucial. While the interest rate (monthly or annually charged) may not be your sole deciding factor, understanding these differences is important. A professional advisor can help clarify these aspects, ensuring you make an informed decision.
Equity Release interest might seem complex at first glance, but understanding its calculation is vital for making a decision that aligns with your financial goals and circumstances.
