Equity Release Alarm Bells !

This is a follow-up to my post “Equity Release Revisisted” which prompted me to look into the subject again and start a new series of blogs on the subject.  I first wrote about this in 2012 and then again in 2015.  (You can find my earlier posts by clicking on Equity Release in the TAG CLOUD).

My research about Equity Release continues and today I stumbled upon a Report commissioned by the Adam Smith Institute, that you would be most unlikely to find, unless it was raining and you had nothing better to do.

It is obliquely called “Asleep at the Wheel: The Prudential Regulation Authority and The Equity Release Sector “.      Sounds like riveting stuff 😀.       Written by Professor Kevin Dowd of Durham University.  It is not exactly bedtime reading, unless you want to go to sleep.

But, it has some interesting facts about Equity Release which I’ve repeated below :-

  • The UK’s Equity Release market nearly trebled in size between 2012 and 2017 and is forecast to grow a further 40% by 2020.
  • Prudential Regulation Authority stress tests in 2017 indicated that a 30% house price fall could lead to losses of between £2 billion and £3 billion.
  • Firms are greatly under-valuing their No Negative Equity Guarantees – guarantees that ensure that borrowers’ debt can never exceed the value of the mortgaged property.
  • We never seem to learn. 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.  Same causes, same results.

The report was published in August and received quite a lot of attention in the financial press.  But, it did not appear on the national news, nor is it likely to have been seen by the majority of older people.  There has been quite a muted response from the Equity Release providers, who have very much played down the report.

The immediate impact of the report does not affect older people who have taken out Equity Release loans, since they already have their money.   The bigger impact could be to the industry as a whole because if this report is correct, they are seriously under-capitalised.

If this report is anywhere near correct, then the Equity Release market could collapse altogether.

Is this the first warning signs of an Equity Release sector in trouble?  It’s probably going to take someone with more time and skill than I have to get to the bottom of this.  

BUT I’ll keep trying.

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3 Responses to Equity Release Alarm Bells !

  1. Allaluah ! finance
    Alarm bells! It reminds of being back on my ship as an engineer, asleep in my bunk, off watch! And the engineers call Alarm sounds for all engineers to descend immediately into the hell hole of the engine room, May be blacked out, to restore normal operational machinery, so the captain and the deck officers can guide the ship onwards into a safe voyage.
    This piece of prose by John is illuminating, and had a double edge sword:-
    1-/- as John suggested the equity release report by the Adam Smith Institute, and then,
    2-/- If one enters [asleep at the wheel: the prudential authority and the equity release sector],
    Both on google, one gets in 1/- the Adam smith report in full and if 2/- one gets a summation/comment by the House of Lords committee.
    I am no financier or accountant, so my understanding of the ‘’fine print’’ is somewhat biased.
    As far as I can see, or understand the reports 1 & 2 deal with ” AN INSURANCE INDUSTRY’’ problem, based upon the modern day equity release models sold to the general British Public {2018}.

    As the title of the paper suggests and John has alluded too, that it may be raining and I have nothing better to do. The full report is sobering in thought, and of nightmarish, not peaceful sleep proportions to me, personally.
    My take on the subject is twofold: The first is what is the risk/agreement/consent between the equity release benefactor, and the client? Reading and understanding the paper, all is based upon the asset value the house increasing in value to both parties: The boogie man to both parties is on paper nothing-However there is a deeper consideration to understand? The equity release company, should its portfolio of equity release be based solely on assets of equity release, one has to consider the time factor and agreement of the client- that is how long do they live? Before the equity release company/insurer has to pay out? If the equity release is taken out at retirement age 68, and lives until well into their late 80,s, has does the monies keep rolling in, in order to honour the outgoing payments? Do we have a ‘Grim Reaper clause’’ where after 5 years, say, you pop your clogs? By mutual agreement? I think not???
    What is suggested by the think tank, is that during the period of equity release is a constant income to the equity release company, such as rent, so that the benefits are twofold; a/ the equity release company does not go bust through lack of investment return[CASH FLOW]? and, b/ the client is assured that the finally agreed market value of the loan [equity release] is honoured. This being the second answer!

    The retirement village model operated by the Extracare Charitable Trust, gives me food for thought, as a UK citizen.
    My basic thoughts are that the Trusts invests in a retirement village, with investor across the social spectrum: there are 33.3% rented properties; 33.3% Shared ownership properties, and 33.3% leased properties {100% in total}. Here I read that the Trust draw on going rent, and the clients either a shared or a value of the equity release (50%) payable only to ones estate.
    As a charity it make a call (subject to ongoing costs- levelled out to a monthly charge) for services charges for the well being and upkeep of the village properties.
    This may not be to everyone s taste: however it originally was conceived to support an active and well balance age group of over 55 year Wolds in a life style of retirement.

    What ever one beliefs are? And what ever one regards as monies, it all comes down to a simple trade, between two parties, and if one can look a person in the eye, shake their hand, and have faith in what the trade is and understand it, then for me I have an agreement in its simplest form-Trust in ones fellow human being!

  2. one caeful thought?
    Should equity release only be for health support in much later life, to bring on a degree of a reasonable/respectable way of living? and then in a retirement village, or home, are we just wishing for a socially mixed group. of infirmed, less mobile and bedridden community??
    One needs hope and to see younger abled persons about one, brings a smile and a thank you.
    Choices in life we all make? what do you wish for? answers on a postcard Please

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