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Advisers warn of steep exit fees on ultra-low rate equity release deals

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  • 05/03/2020
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Advisers warn of steep exit fees on ultra-low rate equity release deals
Pure Retirement’s 2.59 per cent equity release deal made eye-catching headlines this week, but advisers say there is a sting in the tail for borrowers who have to repay the debt earlier than expected.

 

The fixed-for-life deal with a maximum loan to value (LTV) of 32 per cent was a welcome addition to product choice, said advisers. But the early repayment charge structure attached to the deal and its limited distribution were singled out as drawbacks.

Early repayment charges (ERC) are fixed for 15 years on a sliding scale from ten per cent to one per cent from years one to ten. The charge then continues at one per cent for years 11 to 15.

Andy Wilson, director of Andy Wilson Financial Services, said: “The downside for me are the high ERCs. A ten per cent charge on the amount repaid for the first year, reducing to one per cent after nine years is quite high.

“Fixed ERCs are very popular, at least when put against the potentially more costly gilt-linked charges. However, some providers offer fixed charges of five per cent for five years, reducing to three per cent for only the next three years.

“In these cases, it is therefore only repayment in the first two to three years where the borrower may get stung, and usually this can be foreseen at outset. It is therefore a ‘horses for courses’ issue.”

 

Sensible cap

The low LTV cap of 32 per cent was praised by mortgage and equity release adviser Jane King, of Ash Ridge Private Finance as a sensible restriction.

She said it stopped younger equity release borrowers from withdrawing too much of their equity at an early stage of their lives. She also agreed that using a fixed ERC structure was preferable than the gilt-linked exit penalties.

“Fixed penalties are a massive bonus,” said King. “Borrowers don’t like gilt-linked penalties. They don’t understand them. They would rather know exactly how much they have to pay.”

However, the low LTV coupled with the high early repayment charge could pose a problem for some borrowers, said Martin Wade, director of Access Equity Release.

“It’s a great headline-grabbing rate, that’s for sure,” he said. “Innovative and niche products have a valid place alongside the broader market. But it all boils down to bespoke independent advice.

“Crucially, where there is a low LTV cap and long redemption penalties, the advice given today must be fit both now and the foreseeable future ensuring clients are not caught out should they need a higher LTV product further down the road.”

The deal does come with flexible options to help borrowers avoid early repayment charges if they downsize, and there is a three-year ERC-free repayment period on joint plans once the first borrower enters long-term care or passes away.

 

Limited distribution

King said she could see the product meeting the needs of lots of borrowers in the mid sixties to early 70s but was disappointed that she would not be able to offer it to her clients because of Pure’s decision to limit distribution.

She said if the product was the most suitable option for her client, she would recommend they take it from an adviser who had access. She was concerned, however, that this could lead to the client being a charged a high fee by another adviser. King does not charge her clients a fee.

When the deal was launched, it was heralded as the lowest on the market which Moneyfacts confirmed.

However Mortgage Solutions has since seen an illustration that shows the same rate is also available through More 2 Life on its Flexi Choice Super Lite range, with the same early repayment structure. It is believed the More 2 Life deal had been available for around 12 months.

 

Matches lowest on market

A spokesperson for Pure Retirement said its Classic products, which includes the new 2.59 per cent deal, have recently benefited from wider distribution. It is hoping to widen that further in the future. Club members, they said, will often offer a range of fee options, including a fee-free option.

The spokesperson added: “The product is ultimately intended for the life of the customer, rather than early repayment. The ERC rates might seem punitive in comparison to the standard mortgage market, but are widely in line with the wider equity release sector, and we believe the product is best suited to customers who have stable circumstances and whose priority is to access the lowest rate over the life of the mortgage.

“With the lifetime mortgage market dominated by some funding bodies it becomes inevitable that some products will become so similar as to be identical – usually we can differentiate on rate or LTV and hopefully get the jump on competitors in this market. While another product matches our latest rate, it remains the lowest in the market and it’s something we’re proud to be able to deliver.”

 

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