Do You Pay Interest on Equity Release?

Equity release allows homeowners to access the value built up in their property without needing to sell their home or move out. This financial strategy can provide funds for various needs in retirement. A common question among those considering this option is whether interest payments are required. The answer depends on the specific type of equity release product chosen to unlock the home’s value.

Types of Equity Release

In the United States, the most common form of equity release is the Home Equity Conversion Mortgage (HECM), which is a type of reverse mortgage. A HECM allows homeowners, those aged 62 or older, to convert a portion of their home equity into cash. The loan is secured against the home, and the homeowner retains ownership. Unlike traditional mortgages, borrowers are not required to make monthly mortgage payments.

A less common type of equity release is a Home Reversion Plan. With this arrangement, a homeowner sells a portion or all of their property’s ownership to a provider. In exchange, they receive a lump sum or regular payments while retaining the right to live in the home for life. This differs from a mortgage as it involves a sale of equity rather than a loan.

Interest with Lifetime Mortgages

Interest accrues on a Home Equity Conversion Mortgage (HECM). Interest is calculated on the outstanding loan balance, which includes the original amount borrowed plus any accumulated interest and fees. The interest compounds over time, meaning interest is charged not only on the principal but also on the previously accrued interest. This compounding can significantly increase the total debt over the long term.

Most HECMs are designed so that borrowers do not make regular monthly payments. Instead, the interest is “rolled up” and added to the loan balance. This means the total amount owed grows over the life of the loan. While monthly payments are not required, some plans may offer the option for borrowers to make voluntary payments. These voluntary payments can help to reduce the overall loan balance and slow the accumulation of interest. Interest rates for HECMs can be fixed or variable, with fixed rates remaining constant over the loan’s life and variable rates fluctuating based on market conditions.

Home Reversion Plans

Home Reversion Plans operate differently from mortgages and do not involve traditional interest payments. Under this arrangement, a homeowner sells a share of their property’s value to a provider in exchange for a lump sum or regular income. The provider then owns that specific percentage of the home, while the homeowner retains the right to live in the property rent-free for life.

Since it is a sale of equity rather than a loan, there is no interest charged on the funds received. When the property is eventually sold, the provider receives their pre-agreed share of the sale price. The amount the provider receives is directly tied to the future market value of the property, not an accumulating interest charge. This means the provider’s return depends on the property’s appreciation over time.

Repaying Equity Release

The financial obligation from equity release arrangements is settled when the homeowner passes away or moves into long-term care. For Home Equity Conversion Mortgages (HECMs), the loan, which includes the original principal plus all accrued interest, becomes due at this time. The loan is repaid from the sale of the property. A common feature of HECMs is a “no negative equity guarantee,” which ensures that the amount to be repaid will never exceed the property’s value, protecting the borrower’s estate from owing more than the home is worth.

With Home Reversion Plans, the provider’s pre-agreed share of the property’s value is realized upon the sale of the home, which occurs after the homeowner’s death or move into long-term care. There is no loan to repay in the traditional sense, as a portion of the property was sold upfront. The primary method of settlement for both types of equity release remains the sale of the property.