Compound interest explained Unless you choose to do so, there are no repayments to make on a lifetime mortgage until the plan comes to an end. As a result, a lifetime mortgage is subject to compound interest. Compound interest is different to the interest added to a residential mortgage or personal loan. How does it work? With a lifetime mortgage, interest is added either interest already accrued), not just the amount monthly or annually depending on your plan. you initially borrowed. This means a larger During that first month or year, interest is charged amount of interest is added to your lifetime and added to the amount of money you’ve mortgage every period. And this cycle continues borrowed, otherwise known as your initial loan until the plan ends. amount. The amount of interest added will depend Without making payments, this can significantly on your initial loan amount and interest rate. reduce the equity remaining in your home If you’ve had a residential mortgage or personal and leave you with limited financial options in loan in the past, you’ll know the interest added the future. This could mean you're unable to is based on the amount you originally borrowed. remortgage to a cheaper product in years to But with a lifetime mortgage, that’s not the case. come, reduce your ability to privately fund any future care costs, or restrict your options to Instead, the interest is calculated and charged on move home in the future. what you owe (your initial loan amount plus the An example of how compound interest accrues over 20 years Balance at the start of year Interest (6.3% MER) 1 Balance at the end of year 2 Remaining property equity 3 Year 1 £82,475 £5,349 £200,176 Year 2 £87,824 £5,695 £194,481 Year 3 £93,519 £6,065 £188,416 £87,824 £93,519 £99,584
£211,669 £289,802* This cycle continues for the life of the plan £12,891 £17,649
£198,778 £272,153
£76,331
Year 15 Year 20
£0 *Although the balance at the end of the year is higher than the property's value, you'll never owe more than your home's worth with a Key lifetime mortgage thanks to the no negative equity guarantee. Read more about this on page 25. This example is for illustrative purposes only and uses the average release amount of £82,475 and monthly equivalent rate (MER) of 6.3% – Key Market Monitor H1, 2023. Average UK house price of £288,000 – ONS, August 2023. 1. Interest rate: The rate at which interest is applied to the loan – in this case, monthly (MER). With all Key lifetime mortgages, your interest rate is fixed for life. This column shows how much interest has been added to the loan that year 2. Balance at the end of the year: How much is owed at the end of the year, including compound interest 3. Remaining property equity: The difference between how much your property is worth and the outstanding balance of your lifetime mortgage 14
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