Equity Release: Do You Pay Monthly Interest?

A lot of homeowners get caught off guard when they first hear about equity release. The big question that keeps popping up? Do you have to pay monthly interest like you do with a normal loan or mortgage? Think of it this way: with most equity release plans in the UK, you don’t actually have to fork out cash every month. Sounds good, right? But let’s unravel what that really means for your wallet in the long run.

Most people go for the ‘lifetime mortgage’ option when they talk equity release. Yes, interest is charged, but unless you pick a special kind of deal, you won’t pay it each month. Instead, the interest just piles up on top of your original loan. This is called ‘roll-up’ interest—and it's super important to understand because your debt quietly racks up over the years. We’ll break down how this works, and how you might handle things if you’d rather avoid your borrowing snowballing out of control.

Ever come across an interest-only equity release plan? That’s where you do pay the interest off each month, which actually helps keep the total owed in check. It’s a less common setup, but it’s worth knowing about if you want more control over your future finances. Knowing your choices here helps you avoid nasty surprises later when it’s time to repay, usually when you move into long-term care or pass away and your house is sold.

• What is Equity Release Anyway?
• How Interest Works on Equity Release
• Understanding Monthly Payments and Alternatives
• The Real Impact of Compound Interest
• Tips for Reducing Equity Release Costs

What is Equity Release Anyway?

If you’ve built up some real value in your house over the years and fancy getting your hands on some extra cash, equity release lets you do just that—without having to move out and sell up. It’s usually aimed at people aged 55 and over who own their home (either outright or with just a small mortgage left to pay).

The most popular sort is called a lifetime mortgage. This is basically a loan secured against your home, but you don’t need to make monthly repayments unless you pick a special plan that lets you clear off the interest as you go. The money you unlock is yours to spend as you want: home improvements, paying off debts, helping family, or even taking that big holiday you’ve always dreamed of.

The other main choice is home reversion. Here, you sell a slice (or all) of your property to a provider in exchange for a tax-free lump sum or regular payouts. But heads-up: you’ll usually get well below full market value for that portion because they won’t get their share back until you pass away or move out and the house is sold.

• You still live in your home for life, rent-free with both big options.
• You’ll need to be at least 55 for a lifetime mortgage, or often 60-65 for home reversion deals.
• The money you get is tax-free in the UK, and you can usually choose a single payout or smaller chunks over time.

One thing that trips people up: releasing equity reduces the amount you’ll leave behind as inheritance. Also, it might affect eligibility for certain state benefits, so always check before making any decisions.

How Interest Works on Equity Release

The way interest gets charged on equity release isn’t like your standard mortgage. With a typical equity release plan—called a lifetime mortgage—the interest gets added on top of what you borrowed instead of being paid off monthly. This is what people mean when they say 'compound interest.' Basically, it means you end up paying interest on the interest, and over time, the balance grows faster than you’d expect.

You might be thinking: 'How much will this cost me?' Here’s what you need to know. When you take out a lifetime mortgage, the interest rate is usually fixed for life. In 2025, average rates can hover between 5% and 7% per year depending on the provider and your age. The catch is, if you don’t pay anything monthly, it all keeps building until you repay the full amount (usually when your home is sold after you move or pass away).

• With roll-up plans, you pay nothing monthly—interest keeps stacking on top of your original loan.
• There are flexible options called 'interest-serviced' plans, where you can pay some or all of the interest as you go. This helps slow down the overall debt.
• The balance you (or your estate) will need to repay can double every 10 to 14 years if left unchecked, depending on the interest rate and no repayments.

Providers must clearly show how your debt could grow. It’s worth asking them for real projections, so you see not just year one, but year five, ten, or even longer. That way, you get the real picture—no one likes hidden nasties showing up decades later.

Some plans even let you make small, voluntary payments, or pay off the interest now and then, to help keep things in check. If you want to leave more of your home’s value to family, this is definitely worth looking into. Always ask for flexibility and compare plans, because small interest differences add up big time over years.

Understanding Monthly Payments and Alternatives

Here’s the thing about equity release: most of the time, you won’t have to pay out monthly like you would with a regular mortgage. With standard lifetime mortgages—which make up the lion’s share of the market—the interest simply gets added to the amount you borrowed. No fixed monthly bill shows up through your letterbox. But, as simple as that sounds, it comes with a catch. Since interest is rolling up all the time, the total you owe can double in size every 10 to 15 years, depending on the rate. That’s a big deal if you want to leave something for your kids or keep a chunk of your home’s value intact.

Now, if the idea of compounding gives you a headache, you might want to look at the interest-only lifetime mortgage option. Not everyone knows about this, but it’s growing in popularity. Here, you pay the interest as you go—just like with a standard loan—so the amount you originally borrowed stays the same. You won’t end up with a ballooning debt, and your family can predict what needs paying back later. With some products, you might even get to choose to pay off part of the borrowed amount, not just the interest.

• Flexible repayment plans: Many providers let you pay as much or as little of the interest as you want. Some let you stop and start payments if your finances change.
• No monthly payments at all: If money’s tight, you can skip repayments completely with most standard plans, but remember—this means higher costs in the long run.
• Repayment caps: Thanks to rules from the Equity Release Council, you’ll never owe more than the value of your home, no matter how interest grows.

Let’s look at how this shakes out in numbers. Imagine you release £50,000 at 6% interest:

What’s the catch with interest-only? You need enough income to cover the monthly payments, and not all providers offer this route (especially if you’ve fully retired). But it’s a solid way to keep your total borrowing under control while still getting access to your home’s value.

Every equity release setup is a bit different, so it’s smart to talk numbers with a specialist adviser. Compare deals, double-check if flexible or fixed repayment options fit your budget, and consider how your choices affect what you leave behind. No one wants a surprise bill later on.

The Real Impact of Compound Interest

Here’s where a lot of people get tripped up: the way compound interest grows what you owe on an equity release plan is a big deal. With most lifetime mortgages, you don’t pay off any interest as you go—the interest just gets added onto the loan every year, or sometimes even every month. That means you start paying interest on the interest, and it all stacks up faster than you might think.

Let’s break this down. If you borrowed £50,000 at an interest rate of 6%, it’s not just 6% of the original £50,000 each year. In year one, yes, you owe £53,000. But in year two, you pay 6% on £53,000, which bumps it up to £56,180. Give it 10 years, and the total owed could be close to £90,000 if you haven’t made any payments. The debt can double in 12 years at that sort of rate. This is why compound interest is sometimes called the “snowball effect”—the longer you leave it, the bigger it gets.

This matters most if you’re hoping to leave something behind for your family. Equity release can shrink the inheritance you pass on, and it’s usually the compound interest that’s to blame. That’s why experts always say, check the numbers carefully before signing up.

If you want to keep costs down, you do have options:

• Pick a plan where you can pay off the interest monthly. It might mean tighter monthly budgets, but it stops your debt growing out of hand.
• Look for plans that let you pay back small chunks without penalty every year—some let you repay up to 10% of what you borrowed each year.
• Shop around for the lowest possible rate. That equity release rate makes a huge difference over time.

Always use the lender’s calculator or ask for a full breakdown so you can see how much you’ll owe in the future. Compound interest is sneaky, but you don’t have to let it surprise you.

Tips for Reducing Equity Release Costs

If you’re worried about equity release eating up your kids’ inheritance—or if you just want to keep down what you owe—the good news is there are a few simple ways to manage the cost. Even small tweaks can make a difference over the years.

First, compare interest rates. According to Moneyfacts (June 2024), lifetime mortgage rates can range from about 5.5% up to over 8%. A lower rate compounds less, so always shop around. Don’t just grab the first offer from your bank—specialist advisers often know what’s out there.

Next, look for plans that offer flexible features. Options like voluntary partial repayments (with no penalty) let you chip away at the interest or even the principal when you can. For example, some plans let you pay back up to 10% of the original amount each year, totally penalty-free.

• Consider an equity release plan with an interest-serviced option: This means you pay just the interest each month—this stops the amount you owe from ballooning.
• Borrow less if you can. The less you take out, the less interest piles up over time. Seriously, even £10,000 less can save thousands in the long run.
• Think about a drawdown plan instead of taking a big lump sum. With drawdown, you only take money when you need it, and you’re only charged interest on what you’ve actually taken—not the whole pot.
• Use a no-negative equity guarantee. Most reputable lenders provide this, so you (or your family) won’t owe more than what your house sells for. It’s peace of mind, but make sure it’s written into the deal.

If you want to get creative, involve loved ones. Some families help pay the interest each month now, to protect any future inheritance. Not for everyone, but it’s something people try if they can pull it off.

Always get advice from a qualified specialist, not just a general investment adviser. Equity release advisers are authorized by the Financial Conduct Authority, and they know the market tricks that don’t always get advertised. When it comes to tweaking these plans, a little help goes a long way in the end.