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."
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules here