Hodge Lifetime has moved outside the Equity Release Council’s standards for its new ‘hybrid’ lifetime mortgage, a trend which is showing signs of catching on.
James Young, national account manager at the firm, said while the council’s standards have been pivotal in the growth of the market to its current record levels, “there are many in the over 55-year-old age group who have very different financial needs and pressures today than the generation of 25 years ago, who they were originally devised for”.
A contraction in mainstream mortgage market options for older borrowers in recent years has meant many are now looking to the equity release market for an alternative, he suggested.
“For a lot of customers, a conventional roll-up lifetime mortgage may not be the most suitable option, and for the equity release market to reach its full potential it needs to continue to evolve to meet these needs.”
Hodge Lifetime’s new 55+ Interest Only Mortgage provides an affordability-based mainstream option, while the interest-only Retirement Mortgage is a ‘hybrid’ lifetime mortgage which provides some, but not all, of the ERC guarantees.
The Retirement Mortgage sits outside of ERC because the home may be at risk if repayments are not maintained and the interest rate is fixed for five years instead of for life. However, a lifetime term and the No Negative Equity Guarantee are included, as there is an option to roll-up interest later in life.
Mr Young stated: “The benefit to the customer is that the initial interest rates can be a lot lower than conventional equity release - 4.39 per cent five-year fix with 4.2 per cent SVR - the LTVs available are potentially higher, as we can provide up to a 50 per cent LTV based on affordability, and the redemption penalties are also fixed at 5 to 1 per cent for the first five years.
“This type of plan can help to answer the main criticisms of equity release plans, as the interest rates are cheaper, compound interest is avoided and redemption penalties are transparent.”
At the end of April, Key Retirement’s technical director Dean Mirfin criticised the ERC for holding back innovation with its strict rules disenfranchising some interest-only borrowers.
The group’s lending arm More 2 Life has designed a hybrid product to meet the need for higher loan-to-value lending, while protecting the potential negative equity risk. But this would fail the ERC’s no negative equity guarantee requirements.
He suggested some borrowers would be willing to accept this type of loan as a solution, where they understood the risk, if the alternative is losing their home today. “Could the council support moves to help these customers, but perhaps without the official stamp of approval?” Mr Mirfin asked.
Keith Barber, director of business development at National Counties and Family Building Society, said the product standards were developed in an era that is significantly different to today.
“Older people are wealthier than they have ever been, both in terms of housing wealth and incomes, and living longer. This longevity improvement has a significant impact on the cost of providing the long term fixed rate and no-negative equity guarantee that have long been a core part of the standards,” he stated, adding that adjusting these requirements would make innovation more likely and enable products to be offered at a lower cost.
“Improved incomes mean a proportion of older people are fully able to meet monthly mortgage interest payments throughout their retirement, making the no-negative equity guarantee unnecessary and leaving more of their wealth to their eventual inheritors or for other uses.
“Some lenders have been offering variable rate interest-only lifetime mortgages for some years and these have remained firmly outside of the remit and influence of the Equity Release Council,” he added.
However, the JRP Group’s communications director Stephen Lowe said the ERC’s standards have helped stablise a market that was in dire straits a few years ago, so there’s no need to move so aggressively against them.
“We’re in support of the standards, full stop. Those who want to develop products outside, that’s fine, there’s nothing stopping them, whilst remaining members; they just won’t have the badge of approval.
“I don’t think the ERC is dramatically blocking innovation, it will stop some, but the standards are there for a good reason, so firms need to tread carefully,” he added.
Bernie Hickman, managing director for individual retirement at Legal & General, said the group’s equity release business did not feel constrained in product development by the rules, although he admitted lending into retirement has been underserved, adding “it’s an area we’re interested in exploring”.
Vanessa Owen, head of retirement solutions products at LV, responded that it is important to keep the ERC standards under review to make sure they remain relevant and customers can access the types of products they need. “We also recognise that for some potential borrowers the right product might be one that doesn’t have all of the council’s safeguards.”
An Aviva spokesman added: “Product innovation is important and we will continue to look for new ways to help customers, but we also believe that the standards established by the ERC should continue to play a prominent role in supporting consumer protection.”
