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.