One of the most hotly debated questions in the equity release industry has surrounded exit charges. While fixed early repayment charges (ERCs) are the norm in the traditional mortgage market, equity release products often carry variable ERCs linked to the price of gilts. Some don’t see variable, gilt-linked ERCs as consumer friendly but is there another side to them that is worth considering? We asked some of the industry’s leading experts to tell us what they thought of gilt-linked ERCs.
Ryan Mansell, Lifetime Mortgage Adviser, Later Years Financial Solutions.
“I believe gilt-linked ERCs should still exist in the market. Fixed ERCs have changed the dynamic of the industry, for sure, and they have been key to changing the view that all lifetime mortgages have high penalties if you want to pay them off.
“Six years ago this was the case for most plans but, since 2015, the gilt-linked early repayment charges now have features such as downsize protection, the early repayment charge exemption should one applicant pass away or go in to care, the ability to pay capital off and, not forgetting, the right to port the plans to a suitable property.
“The only time that ERCs come into play is if a client plans to clear the debt off in full or repay an amount that is higher than the percentage allowed. This should all be established when you are getting to know your client, their short and long-term goals.
“The gilt-linked ERC is not a problem for clients if we know their future plans and can protect them against the unexpected with the features outlined above. I am sure that some lenders are able to offer their lower rates, and lend on unusual or less desirable types of home, due to this pricing and protection.
“If we remove a gilt-linked ERC do we actually set the industry back? A gilt-linked option could also help the client decide on a fixed ERC as they have something to compare it to and understand the benefit of a fixed ERC. It is all about the right advice.”
David Forsdyke, Later Life Finance Associate, Knight Frank Finance.
“I can understand why some in our industry view gilt-linked ERCs negatively, but many clients prefer them, once they understand them properly.
“Some clients find the concept difficult to understand and there can be uncertainty over exactly what the charge will be. Plus, any adviser attempting to fully explain the pros and cons needs a reasonable understanding of current investment trends and economics. However, it is important that, as advisers, we give clients the widest possible choice. So, yes, I think they have a part to play in the equity release market for two main reasons.
“They help us set lifetime mortgages apart from standard residential mortgage lending. It is essential that we explain to our clients that this is not just another mortgage. The fact that the majority are funded by annuity providers, and have a close correlation with longer term fixed-interest securities, helps demonstrate to new clients that this is a long term commitment and early repayment is not something the client or the lender should expect.
“Once they grasp how gilt-linked ERCs work and understand that the charge will actually only apply in a very narrow set of circumstances, it allows clients to make a fully informed and well educated decision regarding their preferences. It also allows me to include the widest range of products when researching the market for the client.
“I am fortunate that my team and I deal with a lot of HNW clients, many of whom have sophisticated finances and a reasonable exposure to investments which I think helps them to understand these charges. Once understood, some of them prefer the certainty of a fixed charge, and that’s fine. I’m pleased to say the majority say ‘yes’ to gilt-linked ERCs, allowing us to research the entire market for them, and allowing them to proceed with their eyes wide open.”
Liz Murley, Equity Release Specialist, Viva Retirement Solutions.
“It is no coincidence that a lifetime mortgage is branded as such. Funders calculate returns based on how long the contract is likely to run and penalise those who exit prematurely.
“The presumption is that, if the consumer has no demonstrable plan to repay the loan in their lifetime, then the penalty mechanism is irrelevant. With a rise in younger consumers taking out lifetime mortgages, is that a fair assumption? In uncertain times, who is to say plans won’t change?
“The need for penalties is accepted yet, as the market grows, there will be greater scrutiny, so penalties must be clear. Could you ever argue variable ERC’s are that? If you are an experienced investor, perhaps, but this is not typical of our over 55s target market.
“Conversely, fixed ERCs are easy to explain and easy to understand. Admittedly, there is a chance variable ERCs could mean zero penalty. Gilts are at an all-time low but there is talk of negative rates. Are advisers able to predict the future and should consumers take this risk?
“The popular press delight in featuring consumer stories where extortionate exit penalties have been applied. There is still work to do to improve the reputation of our sector so why continue with the variable ERC that has contributed to its poor perception?”
James Sudworth, Independent Equity Release Adviser, The Equity Release Experts
“There has been a big surge away from variable early repayment charges towards fixed ERCs, arguably due to the bad press associated with previous schemes demanding outrageous penalties before all ERCs became capped.
“It is very easy for the press and others to feel that variable penalties are dangerous just because of what has happened recently with the crashing of gilt and interest rates. This has impacted many clients who set up lifetime mortgages in the last few years with variable penalties, but it also means that new consumers may be getting in just at the right time.
“I, for one, believe that now is the perfect time to set up products with variable ERCs purely because gilts are so incredibly low at the moment. It may mean clients will be completely free of penalties in the near future whereas fixed penalties can also be very expensive, with some products having 10% penalties in year one.
“There is definitely a place in the market for variable penalties, especially with consumers who have a solid understanding of gilts, investments and government borrowing. As long as an adviser has the knowledge and ability to explain the pros and cons to consumers, and the consumer has the financial tolerance and ability to fully understand the risks and benefits of both types of penalty, then both fixed and variable penalties have a place in the market.”
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