I read The Actuary article ‘Home truths’ (May 2021) with dismay.
Those who have designed these equity release mortgage products do not seem to understand the possible events as one or other of a couple become elderly. They do not die or move into long-term care simultaneously. For one reason or another, either while one or both are alive, there may well be a good reason to sell their home, and this is where the early repayment charge (ERC) cuts in.
I have found from experience that those providing advice about these products are rather vague about the ERC and it is very difficult in some cases to get a proper and comprehensible description of how it is calculated – let alone why it is calculated in this way.
Of course, when the ERC is applied, it may well be that those concerned will not understand why it is being applied or how it is calculated. If alive, they can complain to the advisor (if still in business). More likely, they will not have the energy or intellect to do so and may be more preoccupied with their own health. If, indeed, they do complain, the procedure is likely to proceed at a pace that ensures they will not survive to its conclusion.
I would urge actuaries not to call these borrowers ‘policyholders’ and to avoid any ERM products that include anything other than a negligible ERC.
G K Hazell
8 May 2021
ERCs: in response
The authors agree with your point on the use of the term ‘borrower’ – that is the correct terminology, given that equity release mortgages (ERMs) are loans.
In relation to your point on early repayment charges (ERCs) and the communication of them, the authors agree that this is a valid and important area for discussion related to ERMs. However, this was not a core area of focus for this article, so was not covered in detail. We agree that any ERCs within ERM products must be clear and fair, communicated clearly at outset, and well understood by borrowers. This is as it should be for any mortgage product, noting the extra focus required for ERMs given the potential vulnerability of borrowers and the additional complexity of borrower events such as in the joint life cases that you raise.
Raj Saundh, Alex Davis and Alex Mockridge
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