Equity-release providers are pricing too low and rates will have to rise significantly over the coming months, says Retirement Plus managing director Duncan Young.
He says present release rates are too low in an environment where interest rates are rising.
At the end of last year, a report by the Financial Services Consumer Panel said some providers are making a loss on equity release. The cheapest lifetime mortgage rate is around the 6 per cent mark, which is only slightly higher than some prime mortgage products.
Northern Rock saw its lifetime business written in 2006 as a percentage of its lifestyle lending division shrink to 0.9 per cent from 1.4 per cent in 2005 but it puts that figure down to a static market.
Young says: “Rates should be going up but they are not yet, although it should only be a matter of time, especially as Basel II requirements will force them up. They look attractive against long-term rates but some lenders are losing as they are too low.”
Key Retirement Solutions business development director Dean Mirfin says: “It is only a matter of time before some lenders suffer the strain from tightening margins.”
Figures from Safe Home Income Plans this week reveal a marginal 3 per cent increase in lifetime mortgage business last year to £1.08bn from £1.05bn in 2005. Overall business was virtually at a standstill at £1.15bn last year compared with £1.1bn in 2005.
However, the total of 8,038 plans sold in the final quarter of last year was up by 16 per cent on the third quarter and 19 per cent up on the fourth quarter in the previous year.
Ship chief executive Jon King says: “Last year saw a substantial increase in the number of new equity-release plans sold.”