Costs and benefits of ERC-free deals

When considering equity release advice solutions, some options can be costly red herrings unless they are fully explored.

In the past I have commented on protected asset options, cost comparisons over time for clients and the importance of the desire to guarantee inheritance.

Following the launch of Godiva Mortgages’ equity release product with no early repayment charge, I thought it would be useful to consider this option and the cost if it is not exercised.

So consider the following case study. Stan is 65 and wants to raise £50,000 from his home. He likes the idea of an ERC-free option as he may come into some money from an inheritance al-though he’s not sure when.

The tables show the difference in cost over time of the ERC-free option compared with an alternative rate from LV= with an ERC for the first 10 years. Assuming Stan opts for the ERC with the lower rate, the outcome is interesting. Unless the loan is repaid during the first five years of being with LV= when the 3% ERC applies, there is no benefit to having the ERC-free option.

If Stan is thinking about switching rates in the future, the effect is more difficult to quantify as we are not able to forecast cost-effectiveness, but he would need to know that he would be paying a premium for having the ERC-free option available.