Equity Release News

An Equity Release Compound Interest Calculator

Compound Interest

When you are considering equity release schemes, you will have no doubt come across the term equity release compound interest calculator. This is a free online tool which allows home owners to explore the effects compound interest can have on the balance of their loan. If you are unfamiliar with compound interest, it may appear that equity release is expensive, but by understanding how and why it is applied to the loan, you can assess for yourself whether you feel it is viable for your circumstances.

What Exactly is Compound Interest?
With any loan or investment, interest is applied at a specified rate. With equity release, certain loans and certain types of savings bond, the interest is accrued and compounded to the balance annually. This can have a dramatic effect on the balance. For example, many people have considered five year savings bonds. The reason they are so attractive is that the interest is compounded on to the balance, which then attracts further interest.

This principle is used in equity release, since there are no monthly repayments on these types of scheme. Instead of making a monthly repayment to offset against the interest and capital repayment, the interest accrues and is compounded on to the balance of the loan. This balance is not due for repayment until the death of the account holder or they move into a long term care facility. At this point, the property is sold and the proceeds are used to repay the loan.

Why is an Equity Release Compound Interest Calculator Needed?
Calculating compound interest can be very complex. During the first year, the interest is fairly simple to estimate, as it is simply a percentage of the original loan. However, each year the balance increases as the compound interest is applied to the balance. This can make it difficult to calculate the long term changes in the balance. Since it is estimated that the balance of an equity release loan will double approximately every eleven years, it can be a little off putting for people who have not seriously researched the subject.

With an equity release compound interest calculator, home owners can explore the annual balance changes and the potential long term implications that the rate of interest will have on the balance of the loan. This can be very illuminating for those who may be offered a slightly smaller sum but at a far more attractive rate. This scenario can prove to be far more financially beneficial in the long term.

The calculations from this type of tool can be extremely beneficial when making longer term plans. It can allow home owners to explore the effects equity release will have on their estate and allow them to make a more informed decision about whether equity release is the correct solution for their current circumstances and requirements.

When to Use an Equity Release Compound Interest Calculator?
When you have applied for an equity release scheme, your adviser or broker will provide the figures documenting the effect of the compound interest over a set period of time. However, it is advisable to use an equity release compound interest calculator before this point. This will help you to understand the full implications of equity release and determine if it is the right choice for your requirements. Using this type of calculator can allow you to map out the potential differences between the different rates offered on specific products.

The calculator can also be used to calculate whether it is in your best interests to take the maximum sum offered. If the increased balance is not attractive to you, it may encourage you to explore other options such as a draw down lifetime mortgage or home reversion plans. Draw down lifetime mortgages offer a draw down facility rather than a cash lump sum. This allows for you to draw down funds as and when you require them. This can be beneficial since you only start paying interest on funds when they have been drawn down. Home reversion plans are a less common form of equity release which allows home owners to sell all or part of their home while retaining the right of residence for the remainder of their lives. This type of plan is only available to the over sixty-five age group but they are not a loan and are unaffected by compound interest.

If you are interested in equity release, an equity release compound interest calculator can prove to be a useful research tool. This can assist you to obtain all the relevant information and make an informed choice about whether and how you would like to proceed.