A preliminary consultation paper issued by the Prudential Regulation Authority (PRA) has raised concerns as to the capital holding requirements of companies providing equity release mortgages.
The subject grabbed the attention of the Adam Smith Institute which published a report last week raising questions the regulator has sought to address.
The PRA oversees approximately 1,500 banks, building societies, insurers, credit unions and investment companies on behalf of the Bank.
Its consultation also questioned whether these providers could provide sufficient funds to cover No Negative Equity Guarantees (NNEG) in the event of house prices slowing or actively declining – especially given that redemption payments are predicated on house sales.
The regulator has also suggested this could affect the provision of a capital benefit to insurers, scale up costs and prejudice the interests of customers, in particular those with high loan-to-value (LTV) mortgages and younger borrowers.
The consultation review will run until the end of September with resulting legislation set to come into force by the end of December 2018.
Timely PRA action
Equity release lending has witnessed a substantial and sustained period of growth over the past two to three years with levels of capital released by homeowners more than doubling in the period between 2015 and 2017.
Figures for the first two quarters of 2018 have continued to emphasise this upward trend, with borrowing levels achieving a record £1.84bn in that time, as well as a significant increase in customers.
However, with mortgage approvals, sales and (most pertinently) house prices experiencing significant reversals in 2018, the issues raised by the PRA report are nothing if not timely.
Purchase approvals were down by 3.81% year-on-year with transactions falling 15.4%.
So, are lenders gambling on continued price growth or is the report overly precipitous in its concerns?
While we should certainly be aware of house price movement, we should also try to avoid, as the Equity Release Council puts it, excessive prudence.
We know how useful equity release is as a tool for funding in later life and we must make sure that we don’t see unnecessarily stringent regulation put in place that will affect a borrower’s ability to use this.
As with all areas of finance, a degree of common sense and an element of caution are key.