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BoE warns equity release lenders not to rely on house price rises to mitigate losses

  • 10/04/2019
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BoE warns equity release lenders not to rely on house price rises to mitigate losses
The Bank of England (BoE) has warned equity release lenders that they cannot rely on rising house prices to get themselves out of the impact of no negative equity guarantees (NNEGs).


The regulator also told pension scheme insurers investing in equity release and commercial property to have a “disciplined approach” and not to buy “whatever is on the market this week”.

Speaking at the Westminster and City Bulk Annuities Conference, BoE executive director of insurance supervision David Rule said regulators supported the sensible diversification of portfolios backing annuities, including infrastructure finance, commercial real estate lending and equity release.

“However, we expect insurers to do this properly,” he said.

Among four key points raised, Rule highlighted that having a set strategy and risk appetite was essential.

“Insurers need a disciplined approach. To put it flippantly, they should not be buying whatever is on the market this week or simply because they see their competitors buying those assets,” he said.

Rule also noted the importance of placing appropriate valuations on the assets being owned.


Equity release risks

Specifically in regard to equity release, he emphasised that lenders were exposed to the risk of individual property prices because they provide an NNEG to every borrower.

As a result, using a house price index to predict future property movements was not sufficient or accurate enough.

“Modelling approaches focused on house price indices do not capture all the risks – a portfolio of options is a very different thing to an option on a diversified index,” he warned.

“Indeed, UK insurers have experienced a number of these guarantees crystallising in recent years despite the rapid rise in UK house price indices over the past decades.”

Rule noted this was partly down to location, but also as a result of borrowers failing to maintain properties.

“One reason is that different localities of the United Kingdom have seen widely varying house price inflation – a national index masks the range of outcomes,” he continued.

“Another is that some properties may become dilapidated if elderly borrowers are unable to maintain the property.

“Willingness to maintain may be lower where borrowers have limited or no equity remaining in their properties.

“Equity release contracts generally require properties to be maintained. But, in practice, losses do occur and cannot necessarily be recovered,” he added.


Consultation reinforcement

The warning reinforces the publication of the latest consultation paper by the Prudential Regulation Authority (PRA) last week into capital requirements and risk assessments for equity release lenders.

Along with setting out a timetable for reviews of risks, the PRA said lenders must allow for possible future borrowing when assessing the risks involved.

And it warned that lenders may not be able to rely on contractual terms which will allow them to cease customer borrowing in certain circumstances.


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