Lifetime fixed rates cost more

The average fixed rate charged for lifetime mortgages has increased compared to the long term fixed rate mortgage, reports Defaqto.

The research firm says the gap between interest rates charged by lifetime mortgages and long term fixed rate residential mortgages has widened considerably over the last two years.

But it adds that the ‘no negative equity guarantee’  is responsible for an additional cost to equity release providers of around 0.7% per annum.

David Black, banking specialist at Defaqto, says: “A number of providers have exited the market over the past couple of years citing either funding constraints or more profitable opportunities in alternative product areas. Equity release has long been thought of as a sleeping giant but, given the perilous state of many people’s pensions, it can only be a matter of time before the two types of equity release schemes – lifetime mortgages and home reversions – become a more integral part of retirement planning.

“The equity release business model clearly favours providers who also sell annuities, but the industry in general faces a number of pressing issues if it is to grow. These include: funding constraints need to be remedied; competition needs to increase along with the entry of more ‘household name’ providers and consumer confidence in the product needs to be reinforced. Increased competition should result in a narrowing of the interest rate gap between lifetime mortgages and long term fixed rate residential mortgages.”