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What a difference an ERC makes

Following on from my article a couple of weeks ago regarding early repayment charges on lifetime mortgages, one aspect sometimes overlooked is the basis on which the charge is calculated.

Lenders typically use one of two methods, irrespective of the period of the early repayment charge. These are to charge ERCs either against the original advance or against the original advance plus the accrued interest.

Research must take this into account if early repayment is a priority.

Taking a loan amount of 50,000, the difference can be seen in the example below. The interest rate used to illustrate the cost of the ERC is the actual annualised rate charged by the provider. Dean Mirfin is business director at Key Retirement SolutionsBy the end of year three, what appears to be the lower cost charge changes due to the calculation basis. In this example the client would have an ERC of 490 more by the end of year five. Maybe not an earth shattering difference but it could be the basis for a compensation claim if the ERC was an aspect of the reason for the recommendation and the client was intending to repay beyond year three.

A little known fact is that Northern Rock does not charge an ERC for loans below 25,001. Neither is there an ERC on its cash plus scheme. For smaller loans where the ERC is an advice issue, this could well be the best choice irrespective of interest rate variance as the lack of an ERC should comfortably compensate for any interest accrual differences if the client knows they will repay in the early years.

The ERC will become a more fundamental factor in the advice process but unfortunately identifying precisely how a lender calculates its ERC is not always easy from the literature. It is only when comparing Key Facts Illustrations that it becomes clear what charging basis is being used. Just one more thing to cloud the research and advice process in equity release.


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