Tuesday, 7 August 2018

Home equity release may cost pension firms billions



UK pension companies may be harbouring billions of pounds of losses from home equity release loans, according to research seen by the BBC.

 
Under equity release, homeowners borrow money against their house's value and don't repay anything until it's sold.


That's fine for the borrower, but there are fears lenders have underestimated how much these loans could cost them.


At least one firm assumes house prices will rise 4.25% a year. If they don't, firms face losses - or even bailouts.


Pensioners whose firms invest in the loans would be protected through the Financial Services Compensation Scheme (FSCS) which is funded through a levy on the industry meaning losses would be ultimately borne by all pension holders.
Parliament probed insurance rules last year and one MP wants to reinvestigate.


John Mann, MP for Bassetlaw and vice chair of the Treasury Committee, which investigated the market last year, told the BBC: "We need to hold a new hearing, a new session, to go into the issue."


 He added: "I think some financial institutions have pushed the boat out too far with this, and that creates a potential systemic risk."


Parliament's report was seen as broadly supportive of the industry, focusing on competition and innovation.


Equity release works like this:

  • Borrowers over the age of 55, take out a percentage of the value of the house.
 
  • They pay nothing; the money is paid back when the borrower dies or moves into care. Interest is added each year or month, and because of compound interest, the loans can grow in size very quickly.
 
  • Borrowers are safe. The loans come with a guarantee that they won't have to pay more than the value of the house. Any difference is absorbed by the lender.
 
  • But the loan can exceed the value of the house it is secured against, especially if borrowers live longer than expected or the value of the house drops, and that threatens some lenders.
 
 
 
 
BBC        News.