Suppose an Equity Release company goes bust?

peterhjohnson

As I'm considering ER, I googled around a bit and found some concerns that the "no negative equity" guarantee that companies offer customers might not be sustainable.

So, if interest rates the companies have to pay were to rise and property prices stagnate/fall then older customers could end up in negative equity. This would appear not to matter to the customers because of the "no negative equity guarantee". However, the companies might be in trouble and I wonder if this could somehow cause difficulties for their customers?

There's some background on the issue here https://blogs.deloitte.co.uk/financialservices/2018/07/the-pra-tightens-its-approach-on-equity-release-mortgages-.html

worried_jim

The debt just gets sold on and bought as an asset by another bank. Bank loan books get sold on all the time.

peterhjohnson

worried_jim wrote: »

The debt just gets sold on and bought as an asset by another bank. Bank loan books get sold on all the time.

I think I see what you mean.

Suppose I'm very much older, owe £600k on ER and my house is worth only £500k. The original lender goes bust and Bank B buys my debt from the Receiver for (say) £400k, They sit and wait for me to die. When I do, Bank B sells my house for £500k (assuming no house price inflation) so making £100k profit.:j

antrobus

peterhjohnson wrote: »

As I'm considering ER, I googled around a bit and found some concerns that the "no negative equity" guarantee that companies offer customers might not be sustainable.

So, if interest rates the companies have to pay were to rise and property prices stagnate/fall then older customers could end up in negative equity. This would appear not to matter to the customers because of the "no negative equity guarantee". However, the companies might be in trouble and I wonder if this could somehow cause difficulties for their customers?

There's some background on the issue here https://blogs.deloitte.co.uk/financialservices/2018/07/the-pra-tightens-its-approach-on-equity-release-mortgages-.html

I think you misunderstand.

A "no negative equity guarantee" is a no negative equity guarantee. The PRA is concerned about the difficulties that might cause to lenders - capital adequacy rules and all that. There is no impact on customers.

If a lender got into real trouble and went bust, customers would just carry on as normal; watching the interest roll up on their account. A contract is a contract.

ACG

Most equity release lenders I think are pension funds.

So I can only assume if the assets do not rise in value then the returns for pension holders are reduced? The pension/investment fund is lending its own money.

No idea how it all works in practice, it is well above my pay grade however.

djphig

Bear in mind that Equity Release companies will only lend a max of just over half your property value (55 or 60% LTV) so in theory, house prices would need to drop substantially before you even have to ask that question.

However, others have answered it correctly above

SonOf

peterhjohnson wrote: »

I think I see what you mean.

Suppose I'm very much older, owe £600k on ER and my house is worth only £500k. The original lender goes bust and Bank B buys my debt from the Receiver for (say) £400k, They sit and wait for me to die. When I do, Bank B sells my house for £500k (assuming no house price inflation) so making £100k profit.:j

An alternative insurer or bank would buy the whole book of another insurer/bank. Not individual cases. (most equity release is done via insurers who have higher capitalisation than banks)

This is really not an issue to think about as you are capped on what you can borrow and the drop in value would have to be significant.