A lack of understanding of the long-term risks means there is a "scandal" brewing in the equity release market, according to the Adam Smith Institute (ASI).
The author of the report, Kevin Dowd, is a professor of finance and economics at the University of Durham.
He said the under-estimation of the long-term guarantees provided by equity release meant the market was primed for a crisis similar to the one which afflicted Equitable Life but "on a larger scale".
Mr Dowd said: "The guarantees at the heart of this problem are the no-negative equity guarantees issued by lenders in the equity release market. These guarantee that the maximum repayment on equity release loans can be no greater than the property price at the time of repayment.
"This under-valuation problem is a ticking time bomb that could do serious damage to the financial health of the equity release sector."
This leaves equity release providers vulnerable to sharp falls in house prices as they made the original equity release agreement when house prices were much higher than they currently are in many parts of the country.
The think tank’s intervention comes at a time when a record £971m was unlocked from the value of homes in the second quarter of 2018.
Mr Dowd said: "The regulator, the Prudential Regulation Authority, has made half-hearted efforts to address this under-valuation problem, but has for years failed to rein in firms that used inadequate valuation methods for their no-negative equity guarantees.
"A recent Treasury committee investigation into the UK life industry missed these problems and unwisely set up the equity release sector as a poster child to be promoted. This equity release guarantee scandal raises far-reaching questions not just about the equity release sector, but also about the PRA’s supervision of it."
David Rule, executive director of insurance regulation at the Prudential Regulation Authority (PRA), said in a speech last year that a 30 per cent decline in house prices accompanied by weak or negative economic growth would lead to losses of between £2 and 3bn for the sector.
The PRA declined to comment on the record for this article.
Alistair Cunningham, financial planning director at Wingate Financial Planning in Surrey, said: "The more reputable lenders will offer (as agreed by the Equity Release Council) no negative equity guarantees, protecting the residual estate from falls in the property, but ultimately if someone is concerned about rising rates and/or falling prices they should not be entering into a lifetime mortgage."
Equitable Life was an insurance business that came close to collapse in the middle of the last decade as a result of having large unhedged liabilities.
david.thorpe@ft.com
