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Baby boomers scramble to release equity in house wealth frenzy

Britain’s baby boomers are releasing unprecedented amounts of equity from their homes, tapping funds traditionally used in retirement even before reaching pensionable age.
Equity release is a way to access funds tied up in property, but also presents a growing risk to lenders who may themselves end up in negative equity as a result of lending to younger borrowers, the Bank of England fears.
Almost 15pc of equity release went to under-65s last year, doubling from around 7pc in 2015, said top insurance regulator David Rule.
Most of this went to those aged between 60 and 64, but a growing proportion also went to under-60s.
Baby boomers scramble to release equity in house wealth frenzy

Credit:
Bank of England
This is a rising proportion of a growing market. The number of homeowners using equity release has doubled in the past five years, and the practice freed up ?870m worth of housing wealth in the first quarter of 2018, a 120pc increase from the same period in 2016, according to the Equity Release Council.
• Reader Service: If you are over 55 and considering equity release make use of the Telegraph's free equity release calculator
Low interest rates have also made the loans attractive to borrowers who may wish to pay the debt off in future, or want to limit the damage to the inheritance left for their heirs.
Equity release allows homeowners to take typically between 25pc and 50pc of the value of their property as cash, borrowed from a bank or insurance company.
Instead of paying it back month by month as with a traditional mortgage, the interest payments generally build up in a growing debt, which is paid by selling the property on the owner’s death.
If younger people are taking the loans - while life expectancies are rising - this means lenders face a greater risk of ending up with properties which are worth less than the debts, warned Mr Rule, executive director of insurance supervision at the Bank of England
Equity release: top tips
The current model depends on house prices sustainably rising faster than the interest bill accrues.
But this is not guaranteed to happen.
“Simple projections suggest that equity release mortgage books could face difficulties in scenarios of flat, as well as falling, nominal house prices,” he told the Westminster and City Bulk Annuities Conference.
“The experiences of, for example, the Japanese property market between 1990 and 2010 and the Italian property market between 2007 and 2017 show that it is possible for house prices in an advanced economy to fall over a period of decades.”
Without rising prices, it is perfectly plausible that a debt of 25pc of the home’s value will end up rising to be bigger than the house’s price after around 20 years. If ever more under-65s take out these loans, then banks and insurers could increasingly find themselves in this position.
Mr Rule also said he expects lenders’ risk officers to pay closer attention to growing dangers in the sector.
Baby boomers scramble to release equity in house wealth frenzy

Credit:
Bank of England
“Underwriting standards do appear to have weakened a little over recent years,” he said.
“Average loan-to-value ratios for these borrowers have also increased a little. We would expect risk functions to be monitoring these trends and keeping boards informed.”
Meanwhile prospective borrowers need to pay attention to the state of the housing market.
If recent falls in prices in London spread to cause a slowdown or flattening of the UK-wide market, it could mean banks are less willing to offer the loans.
The risk is particularly acute for those with interest-only mortgages, who have not paid back the capital of the loan and so are less able to borrow more - which is a hazard, if they expected to rely on this in their old age.
An analysis of the UK housing market by Moody’s revealed that the majority of UK interest-only borrowers, 76pc, will not be able to use an equity release product to fully refinance their loans at maturity. The calculation is based on a 0pc increase in house prices. A modest rise, of 3pc, only improves the picture slightly.
Cracks in the housing market
Nearly one in five mortgage holders, 1.67m, have an interest only product. The Financial Conduct Authority has said that it is “concerned that shortfalls in repayment plans” could cause people to lose their homes. A “significant number” may not be able to repay the loans against their properties when they fall due.
Older homeowners are more likely to have this kind of loan and have less working life ahead of them in order to obtain and finance a new repayment mortgage. A crackdown on banks has seen interest-only loans fall as a share of new lending from 42pc in 2007 to just 7pc in 2016
However that lid has been lifted, giving those with smaller deposits more access to home ownership in an era when prices in large parts of the country have outstripped earnings power.
According to the Bank of England, there was a 45pc annual increase in interest-only lending in the three months to September 2017, despite encouragement from the Financial Conduct Authority to move borrowers away from the product.
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