Early Redemption Charges, normally abbreviated to ERCs, have been the subject of considerable debate over the years within the Equity Release sector.
Under the Equity Release Council, (also confusingly abbreviated to ERC), code of conduct, all Lifetime Mortgages must have a fixed or capped interest rate. This rule provides certainty regarding the interest roll up for the homeowner, and also makes the No Negative Equity benefit calculation workable for the Providers. However the downside for consumers is that the Provider requires compensation for their loss of profit if the Lifetime Mortgage is repaid before its scheduled redemption date which is normally upon death or move into permanent long term care.
During the recent environment of falling interest rates, Providers have usually enforced their ERC clauses rigorously which has proven very costly for many elderly people who redeemed their Plans early. With people entering into Lifetime Mortgages from the age of 55, personal circumstances do often change for a variety of reasons in later life- for example:
- To move home upon the death of a spouse or partner
- To move abroad
- To move into a cheaper home which does not meet the lending criteria of the Provider
Sometimes the amount of ERC has proven prohibitive and the Planholders have been obliged to stay in homes which are no longer suitable for them.
With interest rates now beginning to increase, under the terms of most plans, ERCs will be negligible if the Provider can earn more money by relending the repaid funds to someone else. However the uncertainty about ERCs remains a major concern to potential Lifetime Mortgage applicants, and in many cases, they do not proceed to application because of them.
The Lifetime Mortgage from LV= has always proven attractive to consumers because it offers a fixed and hence predictable ERC alternative. It was very positive for the sector when Hodge Lifetime introduced a Plan which enables 10% of a loan to be repaid annually with no ERCs. The popularity of the Hodge Plan has possibly been the catalyst for AVIVA to provide the same entitlement within their Plan. The AVIVA plan also now enables a survivor to repay the Plan in full for up to three years following the death of their partner, which will provide comfort to those in these circumstances who might wish to move closer to their children.
ERCs have been a source of poor publicity for the Equity Release sector for many years and it is great news that a more considerate and enlightened approach is now being applied by some Providers.
If you would like to learn more about ERCs, it is best to talk to an independent and impartial Equity Release adviser firm like Bower who have access to the whole of the market, and who have specialist knowledge about the ERC clauses within Lifetime Mortgages.
