However, as the modern equity release market continues to evolve to one that offers more flexible features and that appeals to an ever wider cohort of customers there have been some changes in how lenders are approaching ERCs.
In just 12 months, we’ve seen a significant shift with the total number of products offering variable ERCs dropping from 58 per cent to 15 per cent, the number of plans with fixed ERCs climbing from 41 per cent to 53 per cent and the range of products that offer a choice of fixed or variable growing from one per cent to 32 per cent.
This is great news for advisers and their clients for a number of reasons.
The ERC barrier
For some people the sticking point that has sometimes prevented them from taking out their ‘perfect’ product is that it has variable ERCs but with 32 per cent of plans offering customers a choice, it is now easier to achieve the balance between rate, loan to value (LTV) and the range of features available.
Although the debate continues to rage about whether fixed or variable ERCs offer the best customer value, it is hard to get away from the fact that fixed ERCs are easier to explain. Customers are better able to understand what – if any – penalty they may pay if they choose to repay the loan at a particular point in time.
With Aviva recently announcing that they will be offering new customers a choice between fixed and variable ERCs, we are only likely to see more change in the full year 2021 figures. However, it is not only the proportion of products that offer these options that have changed but also some of the finer details.
Many lenders have a ‘compassion clause’ which suggests that if a product is taken out on a joint basis and one of the clients dies then for a set period, the other client is able to sell the property and repay the loan without incurring an ERC.
Standard Life Home Finance which recently unveiled its Horizon range has taken this a step further and clients will not pay an ERC if one of the clients dies or goes into care and the remaining client choses to sell the property.
There is no time limit on the exemption, and it also exists if the client chooses to sell their property to move into one that does not meet Standard Life’s underwriting criteria.
Downsizing protection has been built into this range but not at the expense of the rates as they are still extremely competitive.
When it comes to making ad hoc repayments, equity release plans work in a similar way to residential mortgages in that if the client pays more than 10 per cent of the loan they are also generally charged an ERC.
Which is what makes the Pure Heritage Freedom range interesting as clients can make up to 20 per cent or 40 per cent annual repayments without incurring an ERC – a fantastic feature which can help customers manage their borrowing more efficiently.
While clients typically take out equity release as they seek certainty and are keen to remain in their homes for life, things can and do change.
It is great to see that the market is taking into account this need for flexibility by introducing features and options that are designed to support customers’ choices throughout their later life journey.