Equity release firms face collapse if house prices crash

MORTGAGES that let homeowners use their properties as cash machines are a ticking time bomb with the industry heading for a financial meltdown, a report has warned.

According to the study, published today by the Adam Smith Institute, equity release firms stand to lose billions of pounds and could collapse entirely in the event of a house price crash. This is because the price of policies has not properly factored in the risk of house values falling in the future, it said.

At present equity release companies make healthy profits by charging consumers interest on loans against their homes. But it is feared that if property prices fall, meaning the assets underlying the loans are worth less, then the firms could make losses or in some cases go insolvent.

Prof Kevin Dowd of Durham University, the report’s author, compared the situation to the Equitable Life scandal in which the company came unstuck after making promises to policyholders that it could not afford to keep. He said: “Equitable Life hit the rocks two decades ago because it under valued its long-term guarantees. Now the equity release sector is in deep trouble for the same reason. In both cases, the firms involved got into difficulties because they were using voodoo valuation methods that had no scientific validation. The most astonishing thing is that the Prudential Regulation Authority [PRA] knew about these poor valuation practices but permitted them anyway.”

Around half a million homeowners, many retired, have equity release policies, borrowing more than £8million a day against their properties. The market nearly trebled in size between 2012 and 2017. Baroness Altmann, the former pensions minister, said: “Equity release firms appear to be making good profits, but they need to keep these back to counteract potential future losses.”

The PRA, the Bank of England’s risk arm, declined to comment. It is consulting on how to manage risks in the sector.