Whilst there are significant differences between markets the company believes that there are certain key product features that should apply in any market.
- The product should be designed to allow occupancy for life- this is critical. It is really worrying to see some term products available, say for 5 or 10 years. At the end of that period the lender might be prepared to roll the loan over but this is not guaranteed. The borrower may be forced to sell and repay and perhaps then not have sufficient to buy another property. There also need to be fair provisions that seek to allow continuing occupancy if there is a default.
- There should be a no negative equity guarantee so that whatever happens the lender does not have recourse beyond the net sale proceeds of the home. This needs to be based on net sale proceeds and not leave the estate with costs of sale.
- The borrower should be able to draw funds as they need them and not be forced to take more than they need. The funds do not need to be committed legally as this has capital implications and the borrower is not committing to take the funds but there has to be a reasonable expectation that further funds will be available.
- There should normally be no penalties for early repayment. Whilst it may be called a Lifetime Loan and for many it is just that, this is a period of change and there can be a lot of valid reasons why a person might want or have to move other than the survivor dying or going into care e.g a fall might mean that someone can no longer manage the stairs and wants to move to a bungalow of lower value and to repay the loan, death of spouse might lead to moving in with family members, a planned trade down to a smaller property, moving closer to family etc. The company expects to see voluntary move out rates of between 5 and 10% pa. Early repayment needs to be a normal part of the product and not penalized.
- Interest rate should be variable. Fixed rates, especially longer term ones, do not allow the flexibility that seniors need and invariably incur a penalty for voluntary early repayment. These penalties can be substantial e.g if a woman aged 70 loses her husband and decides to move to somewhere smaller and nearer her family and say long term interest rates have fallen 3% since they took out the loan(as they have in the UK) the lender will determine that she has a life expectancy of 17 years and charge a break fee of 17 x 3=51% !!. Also given the relationship between house price inflation and variable interest rates, a fixed rate actually increases the volatility of the balance remaining to the estate and therefore increases the borrower's risk.
- The product must not be too complex. In theory it could allow for single v married, male v female, health and expected longevity, property region, property type, how funds are drawn, expected future interest rates etc. I am sure an actuary could look at a whole range of further factors so that each loan could be individually underwritten. This is all very logical but could anyone understand it.
Richard Coon is Group Managing Director of Seniors Money International, New Zealand. Richard is founder of Sentinel (now Seniors Money), that introduced Lifetime Mortgages in New Zealand. Seniors Money International is a world leader in home equity release currently operating in 6 countries- Australia, Canada, Ireland, New Zealand, South Africa and Spain.