Equity release warning as rates rise and prices fall

Equity release warning as rates rise and prices fall

Equity release could "go horribly wrong" as house prices fall and interest rates rise, advisers with clients considering the products are being warned.

Philip Milton, an adviser who runs Philip Milton and Co in Devon, told FTAdviser his experience is many clients of equity release products have been “deceived into thinking there are no risks".

He branded the sector "ripe with over-zealous and highly rewarded salesmen doing very nicely out of helping you extract tens and hundreds of thousands from your home".

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But Mr Milton - a self-confessed "property bear" wary of the sector as an investment - cautioned against thinking house prices, which have seen 10 years of price gains, will never fall.

"People considering equity release need to ask themselves, 'how will I cope if residential property prices come back down to earth again, with a bump?'" he said.

Mr Milton said he believes the equity release market to be engaged in "rather unfettered ‘selling’", with "quite juicy incomes for those doing the sales".

"I suppose I have been a residential property bear for almost too long to remember now but if it was the case that there was a nasty shock, what would some of the equity release candidates do with a stagnant market and falling prices, which could descend quite significantly in view of the bubble-like territory in which they have been for rather too long – even say 50 to 60 per cent in the south east - and compounded by increasing interest rates?”

He said clients who do this could end up with a lot less cash than they intended because if house prices fall it is the customer who takes the first hit.

Rory Joseph, a mortgage broker at JLM Mortgage Services, said his firm are doing about twice as many equity release transactions now as a year ago.

His firm is primarily focused on commuter towns, where he said there hasn't been much of a slowdown in house prices.

As FTAdviser previously reported, there has been a 25 per cent drop in equity release sales in London. 

London was the UK's weakest performing region for house prices for the first time since 2004 in 2017, according to Nationwide figures released last month.

The building society reported house prices in the nation's capital city were down 0.5 per cent year-on-year in 2017.

Overall, Nationwide reported UK house prices grew by 2.6 per cent last year compared with a 4.5 per cent increase in 2016.

Another problem in the equity release market is advisers charging percentage fees, Mr Joseph said.

"A £300,000 transaction is not double the work of a £150,000 transaction, so it shouldn't be double the price. That is a sign that equity release is a rapidly growing market that hasn't really settled down yet," he said.

Alistair Cunningham, financial planning director at Wingate Financial Planning in Caterham, Surrey, said equity release should be a last resort for clients, and that downsizing to a smaller property is usually a better option.