Bank of England director raises concerns over equity release risks

Rule says that short-run risks to insurers are limited as loans "can ride out a property market crash as long as the market subsequently recovers".

However he noted that "simple projections suggest that equity release mortgage books could face difficulties in scenarios of flat, as well as falling, nominal house prices".

Rule cited the Japanese property market between 1990 and 2010 and the Italian property market between 2007 and 2017 which show that it is "possible for house prices in an advanced economy to fall over a period of decades".

He added that loan-to-value ratios increase over time unless house price growth keeps pace with the rate at which interest is accruing, "so what you have is a sort of race to the value of the property".

He continued: "The time it takes for the value of the loan to exceed the value of the property will be governed by: the interest rate charged (higher is more risky), the loan-to-value ratio (higher is more risky), house price inflation (lower is more risky) and the age of the borrowers (younger is more risky)."

Rule also noted that underwriting standards "appear to have weakened a little over recent years", with an increase in lending to younger customers under 65, with increasing loan-to-value ratios for these customers.

He added: "As well as loosening of lending standards, another concern might be if insurers are making more loans outside those standards. The great majority of mortgages are within risk appetites, but some loans exceed the limits. This may or may not be a problem.

"For example, it could be explained by medical underwriting of the mortgage that justifies a higher loan-to-value ratio for a younger customer if their life expectancy is impaired. Again this an area that risk functions should be watching."