Mortgage Solutions exclusively reported that Just was readying the launch in June, with group communications director Stephen Lowe saying “it was the right thing to do”.
Following the launch of the fixed penalty deals on 30 June, David Forsdyke, head of later life finance at Knight Frank Finance and former member of the Equity Release Council’s standards board is calling for all lenders to offer dual penalty options.
“What Just has done is sensible,” he said. “It’s time for all lenders to offer their customers this choice.”
“Just is giving borrowers the option of exactly the same headline interest rates but with a choice of early repayment charge structures. The rates unfortunately aren’t priced competitively at the moment.”
Only two lenders, Legal & General and Aviva, do not offer their borrowers the option of a fixed early repayment charge over gilt linked. L&G Home Finance are trialling a product but this has yet to be rolled out to the wider market.
Fixed penalties work along the same lines as a traditional mortgage but they span a longer timescale. For example, a borrower might have to pay a 10 per cent penalty in year one and then each year the penalty reduces by one per cent until it reaches zero. According to Knight Frank, the shortest timescale in the market is eight years offered by Canada Life and one deal from Pure Retirement. A 15-year charging structure is more common, however.
Gilt-linked charges are linked to gilt yields. How those yields are performing when the borrower needs to repay their lifetime mortgage directly affects how expensive their early repayment charge will be. It can also mean they will pay nothing at all.
“Gilt-linked penalties are a gamble, but one that can pay off for some borrowers,” said Forsdyke. “But this is a sophisticated financial product for sophisticated borrowers. For the majority of consumers gilt-linked charges are too complicated and they are at the mercy of economic forces which some understand and some don’t.”
Fixed penalties can also expire much sooner than gilt-linked charges which Forsdyke said was “great news for younger borrowers”.
For example, borrowers who took out a gilt-linked lifetime mortgage with Legal & General, Just or Aviva would be tied into the deal until they reached their late 80s or 90th birthday. A borrower taking a lifetime mortgage with Canada Life, for example, aged 70 would be penalty free by 78 and able to repay the debt should their circumstances change.
Equity release lenders argue that lifetime mortgages are not meant to be repaid early and borrowers receive advice from qualified brokers explaining how the loans work before they take them out.