Yahoo Finance Equity release market in trouble as rates rise and house prices wobble
Vulnerable property prices and rocketing rates are threatening to kill off the equity release boom.
As with the wider mortgage market, the equity release market was plunged into chaos last week as fears of a Bank Rate rise drove lenders to withdraw products and increase rates.
Data from Defaqto, a financial information company, shows lenders pulled a total 93 products, while lifetime mortgage providers LV= and Aviva raised rates by one percentage point on average.
Another lender, Standard Life, upped the lowest rates on one product range from 5.56pc to 7.22pc. The highest rate on the market is now 8.98pc, according to Defaqto – having been 7.58pc.
Years of rock bottom rates have helped fuel an equity release boom, with borrowers unlocking £4.8bn of cash stored in their properties last year – a rise of 24pc on the previous year.
But steep rate rises are now making equity release far more costly.
Financial adviser Andy Wilson said: “With increases of one percentage point or more, this will add £1,000 a year to a £100,000 release of money, which will be further compounded as time goes by.”
To lower the risk of the debt overtaking the value of the property, equity release firms may have to start limiting the amount they lend, Mr Wilson said.
He said: “A reduction in the maximum loan would be the obvious answer, particularly for younger applicants who will have longer for their debts to grow.”
Homeowners who have already released equity from their properties are protected from rate rises. However, the loans they have borrowed could become loss-making for equity release providers if property prices fall.
Consultants Capital Economics and investment bank Credit Suisse both estimate property prices could fall by between 10pc and 15pc if the Bank Rate hits 6pc as feared.
Property expert Jonathan Rolande said large house price falls would hit equity release lenders hard.
He said: “If we see rates increase and also downward pressure on prices, then that’s a huge amount of pressure on companies who’ve lent to customers at rates of 2pc and 3pc, well below the anticipated 6pc Bank Rate.
“We might see a repeat of what happened in the energy market earlier this year, where gas and electricity firms collapsed because they couldn’t cope with the rise in wholesale energy prices but couldn’t pass costs onto customers.”
Paul Neal, of broker Missing Element Mortgage Services, said: “If the property value falls more than expected, then that will hit the lender very hard because of the no negative equity guarantee.”
All plans approved by trade body Equity Release Council must come with a no negative equity guarantee, which means the borrower will never owe more than the value of their property.
While the introduction of the safeguard in 1991 was a victory for consumers, the guarantee leaves the equity release market “very vulnerable to a serious house price fall”, according to Kevin Dowd, Professor of finance and economics at Durham University Business School.
Mr Dowd has long argued that equity release lenders’ valuation models make the loans appear more profitable than they actually are.
He said: “It will all come crashing down in the end.”
He said that, for a £141,000 lifetime mortgage on a house worth £500,000, even high lifetime mortgage rates of 6pc or 8pc would not protect lenders from making a loss.
According to his calculations, if the Bank Rate hits 6pc and house prices fall by 15pc, then the loss to the lender is £40,000 or 28pc of the loan. If house prices fall even more, by 40pc, then the loss would be £58,000 or 41pc of the overall loan.
Jim Boyd, chief executive of trade body the Equity Release Council, said providers “already have robust plans to adjust to once-in-200-year scenarios, such as house prices dropping significantly and never recovering”.
He added: “The No Negative Equity Guarantee has brought certainty and stability to the market through multiple economic cycles by ensuring families and other beneficiaries are free from any risk of inheriting unpaid equity release debts.”
