The equity release sector is in "deep trouble" after "voodoo valuation methods" have led to an underestimation of the cost of loans, a report has claimed.

Right-of-centre think tank the Adam Smith Institute compared the potential problems in the rapidly growing sector to Equitable Life, which struggled to fund commitments after locking itself into paying high interest rates when inflation was high.

It said the Prudential Regulation Authority (PRA) has "missed opportunities" to tackle the issue of companies using "unfit" valuation methods.

Report author Kevin Dowd said: "Nearly two decades and one global financial crisis later, it seems like history is repeating itself."

Equity release allows homeowners to access the money tied up in their property, with the loan amount and interest paid back upon death or when a person goes into long-term care.

Many providers offer a "no negative equity guarantee", meaning a homeowner will never owe more than the value of the property.

But should house prices collapse or there be a prolonged period of negative growth, these loans will be loss-making, impacting firms' balance sheets.

The Institute said the UK's equity release market has trebled in size between 2012 and 2017, with PRA stress tests from last year suggesting it could lose up to £3 billion if house prices fell by 30%.

Mr Dowd said: "Equitable Life hit the rocks because it undervalued its long-term guarantees. Now the equity release mortgage 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."