Compound interest on equity release

Updated May 2026

In this guide, we explain equity release compound interest, how it works on a lifetime mortgage, and how it can affect the total amount you repay over time. Understanding compound interest on equity release is essential before taking out a plan, as it determines how quickly the loan grows. We’ll also show you how to calculate compound interest, ways to reduce its impact, and whether it’s possible to get equity release without compound interest.

What is compound interest on equity release?

Compound interest on equity release is the process where interest is added to your loan balance, and future interest is then charged on both the original loan and the accumulated interest. This is often referred to as “interest roll-up” on a lifetime mortgage. Unlike standard mortgages where you make monthly repayments, most equity release plans allow the interest to build up over time. This means the total loan can grow significantly, especially over longer periods. While this can reduce your monthly outgoings in retirement, it also means less equity may remain in your property for inheritance.

Why compound interest matters in equity release.

Compound interest plays a key role in determining the overall cost of equity release. Because interest is added to the loan each year, the amount owed can increase quickly over time. For example, the longer you have a lifetime mortgage, the more significant the effect of compound equity release interest becomes. This is why understanding how it works is crucial when comparing plans or deciding how much to borrow. It also highlights the importance of considering features such as voluntary repayments or drawdown options, which can help control how quickly the interest grows.

How does compound interest on equity release work?

Compound interest on equity release works by adding interest to your loan each year, with future interest then charged on both the original amount and the accumulated interest. If you take out a lifetime mortgage of £50,000 at a fixed rate of 6% per year and make no repayments at all, compound interest will roll up every year as follows:
Year 1 = £50,000 + £3,000 compound interest. Rolls up to approx £53,084.
Year 2 = £53,000 + £3,180 compound interest. Rolls up to approx £56,358.
Year 3 = £56,180 + £3,370 compound interest. Rolls up to approx £59,834.
Year 4 = £59,550.80 + £3,573.05 compound interest.
Rolls up to approx £63,524...and so on. If you’d like another example of compound interest in action, take a look at our how much does equity release cost page.

How can you reduce the impact of compound interest?

There are several ways to reduce the impact of compound interest on equity release, including: Making voluntary repayments (if your plan allows it) Choosing a lower interest rate product Using a drawdown lifetime mortgage instead of a lump sum Releasing smaller amounts over time These strategies can help slow down the rate at which equity release interest compounds, preserving more of your property’s value.

Can you pay off the interest on a lifetime mortgage?

Some lifetime mortgages let you make voluntary repayments every month so you can pay off some, or all of the interest so it doesn’t roll up (compound) as quickly or at all. A drawdown lifetime mortgage allows you to take cash from the loan as and when you need it, rather than taking it all at once. Compound interest is only added to the cash you take, which means it grows more slowly than it would on a lump sum lifetime mortgage. Some lenders allow you to pay off a percentage of the original loan amount, as an alternative to repaying any interest.

What are the drawbacks of equity release?

Compound interest on equity release causes the total debt to grow rapidly, often exceeding the original loan amount, as interest is charged on top of interest over time. This reduces, or can entirely erase, the value of the inheritance left to beneficiaries. It is particularly costly for younger borrowers who hold the plan for longer periods.

Key Drawbacks of Compound Interest in Equity Release:

- Rapid Debt Accumulation: Because interest is not paid monthly but instead "rolls up" and is added to the principal balance, the amount owed grows exponentially rather than linearly.
- Rapid Erosion of Property Equity: The compounding effect means the equity you own in your home decreases significantly over time.
- Reduced Inheritance: The primary drawback for families is that the increasing debt leaves less, or sometimes nothing, of the home's value for beneficiaries. High Total Cost: Over a long period (e.g., 10–20 years), the total repayment amount can grow to be much larger than the initial cash sum received.
- Impact of Longer Life Expectancy: The longer the homeowner lives in the property, the higher the compound interest grows, making it a riskier option for those who set up the plan at a younger age

Can you get equity release without compound interest?

Technically you can get equity release without compound interest, by choosing a home reversion plan, however this is not a mortgage or a loan. Instead, you sell a percentage or 100% of your home to your plan provider for below market rate in return for a cash lump sum or regular payments. Your provider then owns this percentage of your home and is entitled to this share when it’s sold, usually when you die or move into long-term care. As the home reversion provider is effectively buying a percentage of the home no interest is charged and no repayments are needed.