In view of the recent withdrawal of Godiva from the equity release market, we look at the road ahead & the implications of their actions.
Is the lifetime mortgage market now meandering at a time when innovation was beginning to develop & what products remain for people who are potentially looking to look at early redemption of equity release schemes?
Godiva equity release plans have been ‘temporarily’ withdrawn from the market as quickly as they arrived in February 2008. Coventry Building Society have no set date for a return, but are adamant that this is not the end for Godiva’s lifetime mortgages.
However 18 months longevity was not in keeping with the product they were supporting – namely ‘lifetime’ mortgages.
Nevertheless, Godiva’s boldness at trying to implement a product was welcomed. Equity release companies entering the market now need to establish a niche which can corner part of the market. They achieved that.
Godiva provided two equity release plans that had no early repayment charges; these were the lump sum & drawdown plans.
At the expense of paying a higher interest rate the client could repay their equity release plan at any time with NO penalty. No other company had ever been brave enough to break the mould.
Previously, early repayment charges (ERC’s) had either been set over a specific period of time with the minimum being 5 years with such companies as Hodge Lifetime or New Life Mortgages. ERC’s could also be linked to government gilt rates such as Aviva & Just Retirement or even the Bank of England base rate which Prudential Lifetime follow. (This particular scheme I will discuss again later).
Therefore, for a company to bring in a no ERC product opened new doors for many advisers.
Particular favourite for advisers was the use of this plan as a secured loan.
Clients would be happy with the fact they would pay a premium on the interest rate as a consequence. It enabled people to help their family in the short-term & was particularly popular for the over 60′s who couldn’t sell their properties & needed capital in the short term until the house was sold. The perfect product for this also came with a free valuation – Godiva!
So why have Godiva withdrawn their equity release schemes?
Coventry blamed the cost of funding as the reason for its back-tracking. And there may lie the main reason for the product being pulled. Long term 30 or 40 year funds have risen & with the lender offering customers a long-term deal that could be redeemed without an ERC, Coventry may have found that it couldn’t afford to keep this product going.
So what have we got to look forward to with the remaining lifetime mortgage market?
Well for the competent equity release specialist who knows their products there are still a few alternatives to consider.
Lifetime mortgages are still in effect as their name suggest ‘a mortgage for life’. Equity release providers cost these products accordingly & hence if they are repaid can they can suffer financial loss as a consequence.
Nevertheless, I still feel their is an equity release plan that can potentially match the Godiva scheme, however it only lacks Godiva’s ‘guarantee’.
For advisers in the know, Prudential’s lifetime mortgage scheme has an early repayment charge linked to the Bank of England base rate which is currently only 0.5%. Prudential will only levy their ERC should the base rate fall from inception of the plan, to its eventual redemption.
Although no guarantee exists, market forces are dictating that interest rates cannot remain at such an unprecedented low level for much longer.
Therefore, it can be assumed that anyone completing their equity release scheme with the base rate at 0.5% can safely assume that if they repaid early NO early redemption charge would levied.
Prudential only allow this repayment to be after 12 months has elapsed & they will also reluctantly allow ad-hoc payments to their account should a funds be sent to them.
With the current mortgage market still stagnant, but showing signs of improvement, this Prudential equity release plan could be the temporary alternative to Godiva’s scheme which has now galloped off into the distance.
