About Standard Life Equity Release
- Standard Life has looked after retirement needs for around 200 years
- For equity release, we've partnered with experts Key Retirement Solutions
- Key trades as Standard Life Equity Release to provide content and tools on our website and help with your enquiry
How does compound interest work?
Unless you choose to make them, there are no repayments on a lifetime mortgage until the plan comes to an end. As a result, you pay interest not only on the loan but also on the interest that’s already been added to the loan.
Whether interest is added to your lifetime mortgage monthly or annually depends on your plan. But during that first period, the interest is charged and added to the original loan amount (the sum of tax-free cash you unlock from your home’s value).
- Interest is then calculated and charged on what you owe (the original loan amount plus interest), not the amount you initially borrowed
- This new, larger amount of interest is then added to your loan, and this cycle continues until the plan comes to an end
- This means a larger amount of interest is added to your lifetime mortgage each period
- The interest rate at the beginning of your plan determines how quickly the interest grows which will impact the total cost of borrowing over the term of the loan
Here's an example of how compound interest accrues over 15 years:
|Year||Balance at the start of the year||MER1||Interest added2||Balance at the end of the year3|
This example is for illustrative purposes only and uses the average release amount of £81,703 and monthly equivalent rate of 6.74% – Key Market Monitor Q1, 2023.
1 With all lifetime mortgages, the interest rate is fixed throughout the life of the plan
2 Interest is charged on the balance as at the start of the year, not the original amount
3 The balance at the end of the year including compound interest
4 This cycle continues throughout the life of the plan
How can I reduce the cost of my lifetime mortgage?
There are ways you could reduce your total cost of the borrowing if, for example, you wanted to leave a bigger inheritance to your loved ones.
You have the option to make ad-hoc or regular repayments to help reduce your total cost of borrowing. Even if you can only make small repayments, it will help reduce the amount of interest you pay over the lifetime of your loan.
So, if you were to borrow £81,703, with a fixed 6.74% MER interest rate, and make no repayments at all, after 15 years, your total cost of borrowing would be £223,915. However, by making a monthly £250 repayment, after 15 years, you’d owe £146,440 - with a total cost of borrowing, including repayments, of £191,440. This means, by repaying £250 a month, you, and your beneficiaries, could benefit from a £32,475 net interest saving.
Remortgage to another equity release plan in the future
If interest rates reduce in the future, you may have the option to remortgage your current plan to secure a lower rate.
- If you can secure a lower interest rate in the future (not guaranteed) you can reduce your total cost of borrowing
- An early repayment charge (ERC) may be payable if you choose to remortgage
- All our plans come with fixed ERCs, so they expire after a certain amount of time – your equity release adviser can explain this to you
Consider a drawdown plan
With a drawdown lifetime mortgage, you only take out the money when you need it. This can help reduce your total cost of borrowing, as interest is only charged on the money you release, rather than the full amount available. More on lump sum vs drawdown.
What are the benefits & drawbacks of a lifetime mortgage?
If you're considering a lifetime mortgage, it's important you understand the product in detail.
- You can unlock cash from your home, tax-free, to help meet your needs in later life
- You’ll always retain full ownership of your home and can stay in it for as long as you wish with a lifetime mortgage
- You can choose to make reduced or no monthly repayments to suit your circumstances
- You’ll never owe more than your home’s worth with a lifetime mortgage
- You may be able to remortgage your plan in the future to release further funds or secure a better interest rate, although this isn’t guaranteed and may be subject to early repayment charges
- A lifetime mortgage is a loan secured against your home and subject to compound interest, meaning the amount you owe can grow quickly
- Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits
- Equity release may leave you with limited or no property equity remaining
- Equity release will reduce your financial options in the future
- A lifetime mortgage is a long-term financial product and is not designed to be fully repaid until the death or entry into long-term care of the last remaining borrower, otherwise early repayment charges may apply
What's the next steps?
Things to consider
- All equity release advice relates to Standard Life Home Finance Horizon lifetime mortgages only – a loan secured against your home
- You need to get expert advice before you can go ahead with equity release – we’ll introduce you to equity release specialists Modern Lending Advisers, who offer honest and bespoke advice
- Unless you decide to go ahead, Modern Lending Advisers' service is completely free of charge, as their fixed advice fee of £599 is only payable on completion of a plan
Standard Life Equity Release is a trading name of Key Retirement Solutions Ltd. Registered in England No 02457440. Registered Office: Baines House, 4 Midgery Court, Fulwood, Preston PR2 9ZH. Equity release content and financial promotions have been provided and approved by Key Retirement Solutions Ltd who are authorised and regulated by the Financial Conduct Authority. Any personal data provided on this page will be shared with Key Retirement Solutions Ltd who will use the information to contact you about your enquiry.
Businesses in the Phoenix Group will receive a financial benefit from businesses in the Key Group from the sale of each Lifetime Mortgage or other financial benefits where a customer uses any service provided by businesses in the Key Group typically up to a maximum of 3.65% of the value of the loan or up to 20% for services provided to each customer.
Key Retirement Solutions Ltd uses the Standard Life brand under licence from Standard Life Assets and Employee Services Limited. The Standard Life name, logo and domain are registered trademarks of Standard Life Assets and Employee Services Limited.