Equity release: how lifetime mortgages work and why interest builds up

Equity release lets some homeowners aged 55 and over borrow against their home without monthly repayments. This guide explains how lifetime mortgages work, how rolled-up interest grows, and what the FCA says to check.

What equity release and a lifetime mortgage are

Equity release is a way for older homeowners to turn some of the value of their home, known as equity (the part of the property you own outright), into money while staying in it. The most common form is a lifetime mortgage. The Financial Conduct Authority (FCA, the UK regulator for financial firms) describes lifetime mortgages as loans secured against a property that are not usually used to buy a home and do not have a set term. The lender does not normally seek full repayment until a specified life event, usually the borrower's death or a move into long-term residential care. They are generally limited to people above a set age, usually over 55. A person can take a lump sum, or in some cases draw money in stages or receive regular payments.

How the interest works

With most lifetime mortgages, interest "rolls up". That means no monthly payment is required: each period's interest is added to the loan, and the next period's interest is charged on the new, larger total. This is compound interest, and it is why the debt can grow quickly. The FCA says the debt can grow to several times the amount borrowed. Most lifetime mortgage rates are fixed for the life of the loan, but some products now allow optional payments, including regular instalments, which can slow or stop the growth. A related product, the retirement interest only (RIO) mortgage, works differently: interest must be paid every month, so the lender carries out affordability checks, and the capital is repaid at the same kind of life event.

A worked example of rolled-up interest

The figures below are illustrative only and are not a forecast or a quote. Suppose someone borrows £50,000 on a lifetime mortgage at a fixed 6% a year, with interest added once a year and no payments made. After one year the balance is £50,000 x 1.06 = £53,000. After 10 years it is £50,000 x 1.06 to the power of 10, which is about £89,542, so roughly £39,542 of the total is interest. After 20 years it is £50,000 x 1.06 to the power of 20, about £160,357, of which about £110,357 is interest, more than three times the original loan (160,357 divided by 50,000 is about 3.2). By comparison, someone paying the interest each year would pay £50,000 x 6% = £3,000 and the balance would stay at £50,000. Real products differ in how often interest is added and in what charges apply.

Who it applies to, and who it does not

The FCA's March 2026 market study says the typical borrower is around 71 and that the loan is usually modest compared with the home's value, with a median loan-to-value of around 15% for lifetime mortgages. On the 2025 figures, the average lifetime mortgage was about £80,000 (£2.16bn divided by 27,000). This guide is general information for homeowners in the UK who are considering, or are being asked about, releasing equity; it is not a recommendation. Equity release is not designed for buying a home, and it is not the same as a standard mortgage, which normally requires regular repayments of capital and interest over a set term. A third product, home reversion, where all or part of the home is sold, is very rare: the FCA records only 25 sales across 2022 to 2025.

Advice, costs and the warnings in your paperwork

The FCA says that customers who take out a lifetime mortgage must receive advice first, and that advisers must consider factors specific to these products, including the effect on means-tested benefits and tax. Over 90% of lifetime mortgages are arranged through an intermediary. Under the FCA's rules (MCOB 9), the personalised illustration a lender must give has to carry prescribed warnings, including one to check that the mortgage will meet your needs if you want your family or others to inherit your home, one that the product may affect tax and welfare benefits, and a statement on how any negative equity (owing more than the home is worth) would be treated. It must also state whether early repayment charges apply if you move. The FCA has said these charges can reach tens of thousands of pounds.

• Things the FCA says are worth considering: what the loan will ultimately cost and whether it suits your needs now and later.
• Whether paying a fee upfront instead of adding it to the loan matters: in one FCA example, avoiding an upfront fee would have cost 25 times that fee in extra interest.
• Alternatives the FCA names include downsizing and a standard mortgage, which may suit some older homeowners.
• Family members can attend adviser meetings with you, which the FCA encourages.

Common mistakes and where to get free help

The FCA's reviews found problems in the market. In 2020 it found some advice was too much a form-filling exercise and did not properly challenge customers' assumptions, such as wanting to avoid monthly payments. In 2023 it reported that, across firms responsible for about half of lifetime mortgage sales, advice often fell short and that almost 400 promotions were removed or amended. It has since opened a market study into later life mortgages and expects to publish a progress update by the end of 2026. Common pitfalls include focusing only on the amount released rather than the total owed later, not thinking about the effect on inheritance or benefits, and not asking about early repayment charges. Free, impartial help is available from MoneyHelper, run by the Money and Pensions Service. If you think you were poorly advised, you can complain to the firm and then to the Financial Ombudsman Service.

Check before you act

Rules, products and the FCA's market study may change, and the figures above are illustrative or from the dates shown. It can be worth confirming the details on the official pages linked below and taking regulated, personal advice before any decision.

Sources

• FCA: Market study into later life mortgages, Terms of Reference (March 2026)
• FCA: The equity release sales and advice process, key findings (June 2020)
• FCA: Review of later-life mortgages finds poor advice and misleading promotions (September 2023)
• FCA Handbook: MCOB 9 Equity release, product disclosure