According to research by Over50schoices, based on the latest Equity Release Council (ERC) figures that showed £699m was borrowed in equity release in Q1 2023, over £1.06bn could be paid out in compound interest over a 15-year period. This assumes average rates of 6.2 per cent.
However, the firm said that customers who made voluntary penalty-free partial repayments could “significantly reduce” teh amount they paid.
The research notes that the average sum repaid per equity release plan in 2022 was £1,133. That single payment means over a 15-year period a typical lifetime mortgage of £102,405 would save £1,732 in interest and the same repayment annually over 15 years could save £11,844.
Over50schoices has brought out a calculator to help customers understand the impact of compound interest on their lifetime mortgage and to help them with later life financial planning.
Popularity grows, but confusion continues
Ashley Shepherd, founder and managing director at Over50choices said that despite the growing popularity of equity release and reforms, the market is still “not fully understood by its target market”.
“While every product that meets ERC standards now allows people to make loan repayments to ease the build-up of interest, only one in five of over-55s in our research understand this, while a further 65 per cent do not know if they can or not,” Shepherd said.
She continued: “Making voluntary penalty-free partial repayments will help to reduce the interest burden over time, particularly when you consider the interest rolls up.
“Again, our research shows that consumers are not all fully aware how interest is calculated on equity release products, which is why we’ve launched a new and simple calculator to help them either when considering a new plan or when they have an existing plan and want to calculate how much they can save by making a repayment.
“Making the decision to take out equity release should not be taken lightly and not without fully understanding both the pros and the cons, which is why educating and empowering consumers is so crucial.”