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UK equity release mortgages - An ageing investment opportunity

Publication Date: 03 Oct 2018 - By Permjit Singh By Permjit S.

Multi Asset UK Real Estate


An ageing UK population, significantly more wealth tied up in property, and, according to rating agency, DBRS, a latent desire for homeowners to remain within their homes for as long as possible, have been the drivers for new products to unlock that bricks-and-mortar wealth.

The equity release mortgage is one such creation. It is designed to convert the equity - built up in a home - to cash that can then be used by the homeowners, whilst enabling them to continue to reside in their home.   

The release creates in effect a loan whose interest accrues and is capitalised. Principal and interest on the mortgage are repaid when the homeowner vacates the property.

Another variant, the home reversion plan, is equivalent to the sale and leaseback transaction common in the corporate sector. The home owner sells a stake in their house (say 60%) for cash and then leases their home rent-free from the home reversion company. On sale, the company gets 60% of the sale proceeds.

Quarterly lending volumes of equity release mortgages have almost doubled to £500m from Q2 2016, with year-on-year growth rates of over 20% being recorded since then, says DBRS.  Notwithstanding these impressive growth figures, the market is still comparatively small – just 0.42% of the entire pool of home mortgage loans in the UK.

Insurance companies have traditionally been the primary investor type for this asset. Their long-term liabilities match well the long-term nature of home mortgages. The stratification of securitised debt securities, in contrast to straight debt, could, however, attract a wider investor investor type, such as hedge funds, pension funds, high yield investors, banks, and retail investors.

Could the boom herald a comeback for securitised equity release mortgages, last seen in securitised form in 2005?

"One of the benefits of securitisation is its tranches can provide the right level of risk, duration, etc. to meet investor interests," says Gordon Kerr, Head of EU research, DBRS.

All investors will want to evaluate the longevity risk characteristic of equity release mortgages (created because homeowners could vacate later than investors predicted). If redemptions occur later than forecast, not only would some investors be deprived of cash flow, the delay would push the forecasting of house prices farther into the future, making those forecasts more prone to error.  

Unhedged, these unique characteristics could make the yield on some tranches of equity release residential mortgage backed securities (RMBS) greater than conventional RMBS. This is likely to be seen positively not negatively however by investors that have been starved of yield for many years post-crisis.


I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Permjit S.


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