Compound Interest and How it Can Seriously Affect Savings and Loans

The compound interest calculation can be used to ascertain the remaining equity & hence value of your net estate in the future. This calculator can be used to calculate the amount that you need to save or the total amount of interest that you need to gain in order to reach a financial target in the future.

You can also use it to determine how long it would take you to save a certain amount of money. You can use it to determine the influence of inflation on your savings and investments. It can also be used to determine how profitable your business needs to be in order for you to reach your targeted growth.

Compound interest is interest that is earned on top of interest. Compound interest is very beneficial to those who invest or borrow for long periods. However, it can also be detrimental to equity release plan holders. Here, the compounding effect of the interest works in the opposite manner as interest is charged on interest & added to the balance. The compound interest calculation is shown via the key facts illustration

When using a compound interest calculator , you will need the following values: the initial amount that you will be investing, the interest rate, and the number of years the equity release mortgage has to run.

The power of compounding as it is often call is very strong and can cause numbers to increase greatly. For example, if your initial borrowings on an equity release scheme is £20,000 and the compound interest rate is 8% per year, after one year, your balance have increased by £1600. The following year instead of increasing by the same £1600, the equity release balance will have this time increased by £1728 as it is calculated on the original balance PLUS the previosu years interest. Therefore, the longer the equity release plan runs, the greater the compounding effect on the mortgage balance & consequently the less equity remains in the property, unless the property value increases significantly.

Sometimes you might not always have a compound interest calculator at hand but you might need to calculate compound interest urgently. In such cases you can use the compound interest rule of 72 developed by Albert Einstein who calculated that at an interest rate of 10%, your investment will double in 7.2 years (72 divided by 10). Therefore, if the interest rate is 8%, your money will double in 9 years (72 divided by 8). This is a simple rate of knowing how long it will take your money to grow based on your interest rate.

Saving or borrowing based on compound interest rates is one of the fastest way for your money to grow, or for your equity to reduce.

Before entering into equity release schemes always ensure that you have received a Key facts Illustration produced by the lender involved & meets the statutes laid down by the Financial Services Authority.