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Are redemption penalties an important part of equity release advice? Anne St Ives, Anne St Ives IFA, Cambridge

Jon King, Hodge Equity Release, Cardiff

Dear Anne,

Equity release mortgages are called lifetime mortgages for a very good reason. Clients are likely to have the commitment for the rest of their lives, which for people aged 55 to 60, could be a period of more than 30 years.

10 or 20 years ago it would have seemed almost normal to sell a mortgage that would have lasted 25 years. These days, the idea that clients will stay with the same lender for such a long time could be regarded as almost unbelievable.

Remortgaging has been a way of life for advisers and clients as people look to maximise market opportunities. After all, you only have to look at interest rate movements in the last 25 years to realise the next 25 could be equally volatile and unpredictable.

Consideration of penalties at different stages of the scheme is a vital part of the advice process and one the clients should be actively involved with.

If a plan is being recommended with an unknown penalty, and one which is applicable through the life of the loan, clients need to understand what this could mean in cash terms.

As equity release becomes more popular among a generation more accustomed to moving their mortgages, flexibility will become paramount. Full explanation protects the adviser and provides you with the opportunity to look after the client for life.

Nigel Hare-Scott, Home & Capital, Bedford

Dear Anne,

Equity release products have traditionally been sold as if they are intended to last for the remainder of a client's lifetime. While the design of the lifetime mortgage has met the needs of many homeowners looking to improve their lifestyle in retirement, financial intermediaries will be only too aware of the potential problems associated with recommending financial products that have no satisfactory exit strategy if circumstances change, for example endowments and pension transfers.

The reluctance of advisers to get into the equity release market and the lack of growth in the sector in the last five years is very much attributable to the perception an equity release transaction is the opposite to the first-time buy, a final transaction someone might make which can extend for as long as 40 years and after which the homeowner cannot release any further sums against their property.

This perception of the sector is now outdated. For several years, new providers have been entering the market with predictable early leaving clauses in their products despite the fact the fixed rate on a lifetime mortgage extends for life.

Indeed this year, Godiva Mortgages introduced a product with no early redemption charges at all although a small premium is charged on the interest rate.

From the point of view of the adviser, it is essential to explain to clients the extent of their commitment. In this regard the fact finding process should always assess future aspirations and the likelihood of a change in personal circumstances over the life of a plan.

If clients are uncertain in any way, it is very reassuring that a wide choice of products is available enabling them to redeem plans at a reasonable cost.

Dominic Fraser-Smith, Norwich Union, York

Dear Anne,

When providing advice on equity release an adviser should firstly assess whether equity release is suitable for the individual customers circumstances.

Once a customer has been identified as suitable for equity release the type of equity release product should be considered - does the customer want a lump sum product or a drawdown product with a credit line or even a home reversion product? Obviously if it is the latter product then no early redemption penalty will apply.

If the customer has opted for a lifetime mortgage they should be aware this is a long-term commitment and it is for their lifetime. Redemption penalties are incurred generally when a customer for whatever reason chooses to repay the loan before the expected end of the loan.

It should be noted if the adviser recommends a provider who is a member of Safe Home Income Plans then the customer will be able to port the loan to another property should they wish to move without paying a redemption penalty.

Lenders have redemption penalties on their products as they buy long-term funds at a cost for the duration of the loan. If the customer chooses to repay the loan the lender can be left exposed to fund the cost of that loan for the expected remaining duration of the loan. Therefore to offset this cost an early repayment charge can be applied and this is not a profit-making charge.

As redemption penalties are a feature of equity release products they should therefore be a factor that contributes to the overall recommendation for the customer's individual situation and not be excluded from the discussion and advice for the customer.

Kirsty Jackson, Mortgage Express, Bingley

Dear Anne,

Early repayment charges are an extremely important part of equity release advice for all customers but particularly for those who are anticipating any changes to their circumstances during the ERC period.

Lifetime mortgages should be exactly that: a mortgage for the rest of the borrower's life. Products in the market are priced to reflect this and to be sold on this basis, which is why nearly all of the lifetime mortgages available in today's market carry ERCs.

For customers who are really thinking on a more short-term basis, for example, those who would prefer to pay off the money released from their home in the near future so they can leave a full inheritance or those who are looking to downsize soon, a lifetime mortgage is clearly not the best financial solution.

Such customers clearly need to look at other options, such as shorter-term personal loans or the possibility of borrowing from family.

At Mortgage Express, we not only have some of the shortest ERCs in the market at five years but our ERCs also gradually reduce over the five-year term.