A crisis along the lines of the Equitable Life fiasco in 2000 is brewing in the equity release mortgage market, says a report from the Adam Smith Institute.
The UK think-tank said regulators had not taken a sufficiently tough line with groups that sell the mortgages — and that the companies run huge financial risks.
Equity release mortgages allow people to borrow against the value of their home. The loans are repaid, with interest costs, when the borrower dies.
The institute’s report, written by Kevin Dowd, a professor at Durham University, is especially concerned about the “no negative equity guarantee”.
It called it “a ticking time-bomb” as lenders were making inadequate provision for the risk that the value of a house will be lower than the value of the loan at repayment.
ShareSoc, which represents private investors, said: “Any serious mis-valuation will directly affect the shareholders of these insurers.”
The report added that the Prudential Regulation Authority attempt to tackle the problem had been “half hearted”.