Yahoo Finance Negative equity timebomb for banks as baby boomers cash in housing wealth
A negative equity time-bomb is growing under Britain's banks and insurers as baby boomers are unlocking unprecedented sums of cash from their homes in equity release schemes at ever-younger ages.
Borrowers aged between 55 and 64 now make up 15pc of the market - double the level in 2015, the Bank of England has found.
Traditionally the loans were given to pensioners to fund retirement living costs or care home payments, but now working-aged households are significant borrowers as well.
Overall £870m of equity was released from British homes in the first three months of this year alone, according to the Equity Release Council.
The funds are usually repaid only when the borrower dies and the lender sells the property, giving equity release products the alternative name of 'lifetime mortgages'.
But as borrowers get younger this increases the chance that decades of mounting interest payments will pile up into a debt which is bigger than the home’s value.
Banks and insurers generally offer a guarantee that the borrower will not go into negative equity, so those finance firms will be left bearing the cost if house prices do not rise quickly enough in the coming years.
“Simple projections suggest that equity release mortgage books could face difficulties in scenarios of flat, as well as falling, nominal house prices,” David Rule, the Bank of England’s top insurance regulator, told the Westminster and City Bulk Annuities Conference.
The industry is built in part on the UK’s recent history of rising prices. Some pensioners rely on their property to fund their retirement, counting on an ever-rising market to given them access to funds via lifetime mortgages.
But Mr Rule said that this is not guaranteed to continue in the long-term.
“The experiences of, for example, the Japanese property market between 1990 and 2010 and the Italian property market between 2007 and 2017 show that it is possible for house prices in an advanced economy to fall over a period of decades.”
The warning comes at a time of slowing house price growth.
Property prices in London havefallen over the past year in the first annual fall since the financial crisis, as stretched valuations, slow-growing wages, restrictions on landlords and the prospect of higher interest rates all combined to limit buyers’ offers.
