THE lifetime mortgage market is booming.
In the first six months of this year nearly 23,000 UK households chose to release some of the value from their homes, with the total sum paid out via lifetime mortgages sitting at just over £1.7 billion. That was up from £1.3bn from almost 18,000 homes in the same period last year, according to the Key Group.
The proportion released in Scotland is growing just as fast, with 1,320 lifetime mortgages sold north of the Border in the first half, up from 1,037 last year. The total sum borrowed - or released - rose from £47 million to £68m.
So lucrative is the market that one of its biggest players - Legal & General - is looking to increase its market share, last month announcing a deal with Virgin Money that will see it provide equity release products to interest-only mortgage customers of the bank that are approaching retirement.
When it published its first-half results this week Legal & General, which made lifetime mortgage advances of £521m during the period, said it expects total market volumes to top £6bn by 2020, up from an estimated £4bn in 2018.
Not everyone is happy about that prospect, with lobbying group the Adam Smith Institute warning earlier this week that the equity release sector faces “a ticking timebomb” because of the guarantees given to borrowers that the amount they owe will never end up being greater than the value of their property at the time of repayment.
Most equity release products come in the form of lifetime mortgages, meaning the money is forwarded as a loan and as such carries an interest rate. It is also possible for homeowners to sell all or part of their home to a provider while retaining the right to live in it.
With a lifetime mortgage the sum borrowed gets paid back either when the person dies or goes into long-term care, with the amount owed increasing over time for those choosing not to make monthly interest payments.
Typically the amount owed will double every 15 years, with most providers including a no-negative-equity guarantee.
However, according to Durham University economics professor Kevin Dowd, who wrote the report issued by the Adam Smith Institute, these guarantees have “the potential to undermine the financial health of the firms that issue them” because they are based on “voodoo valuations”.
Specifically, Mr Dowd said the sector could be heading for collapse because the guarantees, which are based on how long providers think borrowers will live and how much their property will be worth when they die, have been undervalued.
While the Prudential Regulation Authority looked into the matter two years ago, Mr Dowd said its attempts to address the issue have not gone far enough.
Industry body the Equity Release Council refuted Mr Dowd’s claims, noting that “since the no-negative-equity guarantee became a feature of equity release plans in 1991, every customer who has been entitled to this protection from our members has had this commitment fulfilled”.
“Managing risk is fundamental to what the equity release and insurance industries do,” it said, adding that equity release lenders “are regulated firms that operate within strict UK and EU rules”.
“Equity release products – including lifetime mortgages and home reversion plans – are among the most highly regulated financial services products in the UK,” the council said.
“As well as formal regulation by the Financial Conduct Authority and Prudential Regulation Authority, Equity Release Council members also follow a strict set of consumer-focused industry standards, established in 1991, to ensure a safe and reliable market.
“These standards are regularly reviewed so they remain fit for purpose.”
With lifetime mortgages being, by definition, long-term products, it could be some time before it becomes clear whether Mr Dowd’s predictions are correct.
In the meantime, growth in the sector shows no sign of abating, with Responsible Equity Release managing director Steve Wilkie noting that people are turning to equity release for a growing number of reasons.
“Historically, equity release has been driven by homes and holidays, with two thirds of our customers naming improvements to the home and a third listing holidays as the main usage,” he said.
“Whilst these items are still close to the top of the list, customers are also choosing to plan ahead and invest into their family’s futures.
“Additionally, while pension funds are free to be passed on from generation to generation, property falls under inheritance tax rules so it’s often more effective to look to the home to provide a retirement income.”
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