The Prudential Regulation Authority has published new guidance for equity release lenders to address the risks surrounding the existence of a 'no negative equity' guarantee.
The proposals are aimed at making sure providers operating in this area include an appropriate allowance for the risks they are exposed to in their balance sheets.
In a consultation on the proposals, the PRA stated: "The presence of a no negative equity guarantee as a feature of an equity release mortgage may significantly increase its risk profile when compared to an equivalent product without [one]."
A no negative equity guarantee on an equity release mortgage means the borrower will never owe more than the value of their property and all plans approved by the Equity Release Council must offer this promise.
But this pledge requires the lender to make an assessment of the present value of obtaining possession of the property at some point in the future.
Current rules illustrate this as a deferment price and reflect the PRA's view this will be less than the price for possession today.
The PRA stated the extent to which that price is greater than the deferment price does not depend on views on future house price growth, because both immediate and deferred possession give exposure to future house price growth: the only difference is the value attributed to possession during the deferment period.
But the PRA has set out to provide more clarity on how lenders should address this issue, and the PRA concluded the best view of the deferment rate would be 2 per cent.
In a statement this morning (2 July), equity release provider Just stated its capital position as of the end of 2017 was calculated on a basis which was consistent with the current rules.
The provider stated: "The group looks forward to playing a full part in an open consultation, both bilaterally and in conjunction with the Association of British Insurers and the Equity Release Council.
"Just Group observes that future UK residential house prices will be the result of a number of economic factors.
"We would welcome publication by the Prudential Regulation Authority of a common economic stress test against which both banks and insurers could test their portfolios."