Compound interest

People are concerned about the effects of compound interest accumulating in a Lifetime Mortgage. And yes, interest does compound if you don’t make any payments. As stated elsewhere on this site, modern Lifetime Mortgages will allow you to fully or partially service the interest for as long as you want. Or they will allow you to make casual ad-hoc payments as and when it suits you, and in some cases, a combination of both!

Compound interest came up in a discussion I was having on a social media site recently. The individual stated that he’s 57 years old and has a house worth £500,000. He went on to say that if he borrowed £50,000 today to make home improvements and were to die in 15 years, there’d be nothing left for his estate!

So wrong.

Here are the sums. Because of his age and the fact an advance of £50,000 only represents 10 per cent of the value of his home, he would qualify for some of the best rates available today. At the time of writing, May 2023, that would be about 5.6% fixed for life. Not for one year or five years, for life. However, for this example, being cautious, I’ll use 6%.

After 15 years of compound interest and no payments being made, the debt would grow to £119,872. Meanwhile, his house value will have changed over the years, but let’s assume for this exercise there’s been no growth in value. There would still be £380,172 left that would pass to his estate and therefore his beneficiaries. The lender never keeps the surplus.

Compounding of interest need not be a problem anymore with a modern Lifetime Mortgage. Section 8 of the KFI Illustration document clearly displays a table of the borrowing and the compounding of interest over the years. Nothing is hidden.