"But what do people compare lifetime mortgages to? Normal residential mortgages, of course. And this is the problem."
Another popular objection brought up by the 'last resorters' is the issue of interest rates. Time and again it is mentioned that 'equity release is too expensive' and that 'interest rates are too high' – but how much truth is there in this?
To tackle the point of interest rates first, over the past few years rates have steadily fallen and some lenders are now even offering sub-5%. In fact, if you compare the way equity release interest rates have shifted compared to other personal borrowing vehicles, we come out on top. The Equity Release Council's spring Market Report, released last month, revels that, 'Equity release products saw the most significant fall in rates across all mainstream personal borrowing options, between July 2016 and January 2017.' Lifetime mortgage interest rates actually dropped 51 basis points in this period to an average of 5.45%, whereas personal loans, the second biggest faller, dropped by just 46 basis points.
This fall in interest rates throughout the equity release stable of products is even more impressive when you consider how many new features have been added. For example, flexible features like downsizing protection or the ability to pay off some or all interest accrued each month could have led to increases in the basic rate offered, but they haven't. Equity release lenders continue to add layers of safety and flexibility to their products while interest rates continue to fall, and this should be applauded.
So why is our market frequently written off as 'too expensive' when the facts seem to tell another story? The simple answer is that people calculate how expensive they believe something is by comparing it to something they think is similar – and we all do this. If you wanted to buy a second-hand car, you would look at the price of other cars of the same model, age, mileage and so on have sold for before going ahead with any deal. But what do people compare lifetime mortgages to? Normal residential mortgages, of course. And this is the problem.
It is true that lifetime mortgages tend to come with higher interest rates than traditional mortgages – between 5% and 6% for former and 1% and 2% for the latter. Based on this and this alone, it would be an easy choice as everyone would go for a normal mortgage. But this comparison completely ignores the fact that equity release is structured differently and demands no immediate repayments – something that many lifetime mortgage customers feel is a key benefit to them along with a plethora of safeguards including the No Negative Equity guarantee and fixed or capped interest rates.
But most importantly the comparison negates context. Thanks to the MMR, many older homeowners are struggling to secure a normal mortgage that runs into 'later life', so comparing the two is frankly meaningless for these people - to them it is like comparing apples and oranges.
With the population ageing and no real plan in place to tackle the huge effects this will have or their requirements, there needs to be a number of products on the market that can provide retirees with the financial flexibility they need in later life. The mainstream residential mortgage market has limited appetite to lend to people they see as 'too old', so the task must fall to us. For years we have battled for safeguards and increased flexibility to become the norm within equity release but there needs to be a deeper understanding of the costs to enable customers to understand the differences between lifetime mortgages and mainstream mortgages and until we make it clear that the lifetime mortgage is different, and should therefore be treated as such in any comparison, we will continually come up against this brick wall.
