Longer ERC periods threaten flexibility

At a time of seemingly ever-increasing good news in the equity release market, a change has slowly crept up on us while nobody was looking.

Few customers expect to repay an equity release scheme early. However, due to recent rate reductions, some who took out schemes over five years ago are repaying. They are remortgaging to take advantage not only of improved rates but also of the added flexibility many schemes now provide.This market is no different to others in that nobody wants to pay more than they have to. The best feature of remortgaging in this market – as well as the improved rates – is the advent of more creative schemes and improved lending criteria.So what has been the change that has crept up on us over the past few months? A trend has developed toward extending early repayment charges. These are no longer limited to the typical five years. The trend is toward extending the penalties to span 10, 15 and even 20 years of the loan’s life.Lenders may well argue that in the years to come it will be hard to find rates lower than they are at this time, and they may well be right. However, what this trend could lead to is a regime whereby it will become increasingly difficult for borrowers to benefit from developments in the market.The most dramatic and obvious change has been with Northern Rock. Its fixed rate product previously had early repayment charges which applied for the first five years only. This term has now been extended to 20 years.Customers are benefiting hugely from market forces that have driven rates down, as my examples from last week show. Despite this, it is in the shorter term that flexibility will typically be exercised.If flexibility is lost, many may look more carefully at whether the lowest rate today will prove too restricting in the short-term, when flexibility might be of greater value.The increased early repayment charges are a sign from lenders that they are fearful the market is fundamentally made up of financially aware customers, many of whom will work with their advisers to do their sums and consider their options over the years.Increasing the life of early repayment charges will assist in creating a new criterion for consideration in the advice process now the differences between providers are becoming more pronounced.