The price gap between equity release and mainstream mortgages will narrow– especially when base rates start to rise, reckons Simon Chalk, technical manager, equity release at Age Partnership.
Lifetime mortgages are typically priced from 5.3% – a far cry from sub-2% 5-year fixes available in the mainstream market.
But such is the long-term nature of funding that Chalk doubts the equity release market will be troubled when base rates start to rise, unlike the mainstream market.
He said: “If we see base rate rises that will change pricing on standard mortgage products and close the gap with equity release which could make us more attractive. Long-term funding is a long-term liability so it shouldn’t have a great effect.
“While the market grew to £1.4bn in 2014 the funding was well in excess of the money put away. That will drive down prices because we’ve got pent up supply.
“International banks talk to us as do pension and investment funds from overseas. There are lots of institutions and people with deep pockets looking to put in funding.”
He added: “On the flipside if base rates rise people will get better rates from cash ISAs meaning there is less of a need to turn to equity release!”
Bower Retirement’s chief corporate officer Andrea Rozario was hostile towards comparing the two different products, but she thinks there will come a time when doing so is more appropriate.
Unlike regular mortgages lifetime products have fail-safe measures built in such as a no negative equity guarantee, security of tenure, financial advice and a sign-off from a solicitor.
Rozario said: “We need to get away from making comparisons – it’s a misnomer. The products are not the same.
“You can say there is less of a gap and it’s more attractive but that doesn’t necessarily mean that equity release is right. Another product might be right.
“Interest rates are irrelevant and it is the effect of compound interest that needs to be considered more seriously.
“In a couple of years we will see lending in retirement being more popular, which will make talk of interest rates more important, but at the moment there is not enough choice for the consumer because of standard lending criteria.”
Nigel Waterson, chairman of the Equity Release Council, reiterated the importance of protections built into later life products. He said: “Last year saw competition in the equity release market push rates to record lows, which certainly bodes well for the future.
“It’s important to remember that product rates are impacted by the protections and funding involved, with lifetime mortgages differing from mainstream mortgages by giving borrowers the extra security of a fixed rate for an indefinite term and protection against negative equity, as well as guaranteeing their right to tenure.”