This week the Equity Release Council announced it was adding a new guarantee to its standards. It means that from 28 March, any borrower taking out a lifetime mortgage that meets ERC standards will be guaranteed the ability to make partial repayments towards the loan without having to pay any penalties.
While brokers were happy to see the new guarantee added, there were warnings that the ERC would be better served by introducing guarantees to push lenders to do more, rather than simply reflect changes which have already taken place.
Stuart Powell, managing director of Ocean Equity Release, welcomed the new guarantee as he said it would improve confidence in the equity release sector among borrowers.
However, he questioned the timing, noting: “Everyone in the industry knows that all equity release lenders have been allowing clients to pay at least 10 per cent off a lifetime mortgage annually for years now.”
Powell argued that the ERC should instead “lead change more” rather than simply reflect it, after it is already an established practice within the sector.
He continued: “As an example, I have been advocating for years that it should be a rule that each ERC member adviser pledges to review each of their clients every two years. We know that 2021 was a record year for remortgages of equity release plans, however only five per cent of those with an old equity release plan remortgaged. If the ERC could lead on this topic rather than wait until it was a standard practice in the industry, that would lead to a massive boost in consumer confidence.”
Tackling negative preconceptions
Andy Wilson, founder of Andy Wilson Financial Services, noted that the reputation of equity release was still negative for many borrowers ‒ and with some older mortgage advisers ‒ due to its chequered history, but suggested this was changing.
He explained: “Recent years have seen massive product improvement and innovation in the market. This new guarantee will prevent lenders from offering products that only allow full roll-up of the interest charged – a criticism of older products. This means borrowers can make regular, or ad-hoc payments, to either keep the debt constant, slow down any compounded interest debt growth, or indeed make capital repayments to reduce the debt. Some lenders already offer this option as standard.”
Simon Gray, managing director of HUB Financial Solutions, agreed that partial repayments have been an option for some time, and said the ERC’s move was welcome as it ensures standards across the market catch up with existing best practice.
He continued: “It is good to see that the ERC’s standards are evolving. The Council’s standards for membership, such as the No Negative Equity Guarantee that ensures no customer need pay back more than the value of the home, are crucial to building long-term customer confidence and strengthening consumers’ confidence in the way the market operates.”
ERC can do more to highlight benefits of equity release
Samantha Bickford, managing director at The Equity Release Lady, urged the ERC to focus its efforts on promoting equity release and lifetime mortgages as a potential solution to the ongoing cost of living crisis.
She explained: “A large percentage of those at risk of being unable to ‘heat or eat’ are aged over 55 homeowners.
“The ERC could use its voice to spread the message that a lifetime mortgage could be a potential short, medium and long-term solution to those who struggle to pay their bills, heat their homes, maintain their property, enjoy their lifestyle and support their families.”
Tackling fees
Wilson welcomed the innovation seen in the equity release sector, particularly as a result of new entrants coming to market and adding to the best features of existing deals. He pointed to smaller drawdown sums as a good example of this.
However, he suggested there was still room for improvement on advice fees, which could be an area for the ERC to consider for future guarantees.
Wilson explained: “I would start with outlawing advice fees that are linked to and expressed as a percentage of the size of the loan. Commission payments are already calculated this way, and yet the work involved on each case is broadly similar. A fixed advice fee would reflect this.”
A question of trust
One potential benefit of the guarantees may be that they make mainstream brokers more comfortable about partnering with equity release specialists for their clients. However, Wilson argued that brokers and other introducers rarely have much of an understanding of equity release products, features and the benefits available, so such guarantees are unlikely to have a huge bearing on those connections.
He continued: “Instead, they simply want the reassurance that they are sending their clients to an adviser who does know the products inside out and will always deliver the best service possible. I don’t know the components of my modern car or how it works, but I have a garage I recommend to friends and family that I trust to have that knowledge and deliver it safely and professionally.”
Will Hale, chief executive at Key, noted that the number of advisers becoming active in later life lending is on the rise, spurred on either by borrower enquiries or a recognition of the potential of this market.
He continued: “Additional standards will no doubt support this growing interest, but the industry still has an important job to do in educating customers and advisers around the benefits of modern equity release. Deals such as Key’s collaboration with Mortgage Advice Bureau to create MAB Later Life are also valuable as they highlight the need to challenge silos and for mainstream and later life advisers to work together to achieve good outcomes for all customers.”
