This follows criticisms made by former Financial Conduct Authority mortgage manager Lynda Blackwell who said gilt-based lifetime mortgages were of “poor value”.
She also said the average customer could fail to understand the risks and costs associated with gilt-linked equity release ERCs. Gilt-based ERCs are dependent on gilt redemption yields at the time a borrower wishes to make the payment. This means if yields are lower than quoted when a plan was taken out, charges could be higher than expected. This can be at a maximum of 25 per cent of the total loan.
If a plan is taken out when yields and interest are low, then a rise later down the line could see a borrower pay no penalty for an ERC. A gilt is a government issued bond and the government pays a fixed interest rate to the investor until the bond matures. When this date is reached, the government pays the face value of the bond at the present time.
The fixed percentage charge now offered by Aviva reduces on a sliding scale over 15 years, starting at nine per cent. The choice between fixed and gilt-based must be made at outset as the option can not be changed later. All subsequent borrowing will have the same chosen charging model applied.
The changes give advisers flexibility to select the most appropriate ERC for their client.
Stuart Robinson, managing director of Aviva Equity Release, said: “We’re delighted to be able to offer our customers the option of choosing either the fixed ERC or gilt-based ERC, depending on what best suits their circumstances. The additional option introduced through these changes provides further flexibility to support advisers in tailoring advice to meet clients’ needs in retirement.
“The great news is that the ERC exemptions which apply to our gilt-based plans will also apply to our fixed based contracts. This means customers can still benefit from the many features we currently offer, such as the 10 per cent per annum voluntary partial repayment (VPR) option.”
These changes also come after the news that Aviva removed restrictions from its lifetime mortgage range which limited the number, value and frequency of repayments borrowers could make toward their debt.
All existing loans will continue to have any applicable ERCs calculated on their current gilt-basis. All features, such as VPRs, are available on both options.
