Chairman Jon King believes that the report provides a useful contribution to the debate on the value and cost of SHIP members’ No Negative Equity Guarantee and serves as a useful reminder to IFAs about why equity release products carry higher interest rates than conventional mortgages.
Jon King commented: “SHIP welcomes the Defaqto Report as a valuable contribution to the equity release debate. The report confirms that offering a no negative equity guarantee costs money- one of the reasons why equity release mortgages are more costly than conventional mortgages and an issue that tends to confuse both IFAs and consumers.
“The other reasons are that finance for equity release mortgages is priced via long term interest rates rather than money market rates used for variable rate mortgages which means that lifetime mortgages attract a higher rate of interest for consumers as it incorporates the higher risk for providers. In addition, equity release mortgages attract considerably higher sales costs because of the age of consumers and the need to involve family members in the consultation process.
“The Defaqto report follows the Institute of Actuaries report in January 2005 that estimated the average cost of providing a no negative equity guarantee at 75 basis points per annum. All SHIP members provide this as a cornerstone of its four product guarantees. This has proved immensely popular with clients as it means that no matter what happens to the property market in the future they will never risk losing their home. They are also able to move home in the future and will also receive independent legal advice signed off by certificate. A SHIP logo means peace of mind and the assurance that neither a client nor their beneficiaries will be asked to find money that isn’t available. With increasing speculation about a possible slowdown in the property market, this guarantee takes on an even greater significance in the current market.
“Dwindling pension funds allied with record growth in the property prices in the last decade and historically low interest rates make equity release an increasingly attractive option for many pensioners. The real value of providing a No Negative Equity Guarantee is that it allows the industry to be proactive. By offering real peace of mind to customers and a guarantee that they will be able to live debt free it helps to promote confidence in the sector and ensure its continued growth.”
