Basle II rule could raise equity rates by 0.75%

Equity release rates could rocket by as much as 0.75% if Financial Services Authority capital requirements go through, industry sources have warned.

On the back of the Europe-wide implementation of the Basle II capital adequacy requirements, the issue concerns the classification of lifetime mortgages as investment assets rather than residential mortgages.

Equity release providers had expected that the capital weighting – the amount of money placed in reserve by lenders in proportion to the amount lent – would be set at around 50%.

But a memo from the Financial Services Authority places the level at 100%, double previous expectations.

This has whipped up a storm in the industry and trade body Safe Home Income Plans is consulting with the regulator to reach a resolution.

Simon Little, senior product and marketing manager at GE Life and chairman of the mortgage product board at SHIP, says: “It is likely there would be a 0.75% rise in rates. Discussions are ongoing with the FSA to get to the bottom of this but there is sufficient reserve in terms of lifetime and home reversion so why add more requirements on top?”

Another source tells Mortgage Strategy: “If this did go ahead it would have significant ramifications for product design. What would happen to no negative equity guarantees?

But Joseph Eyre, spokesman at the FSA, says: “There is a distinction between investment assets and mortgages This is something we’re discussing with the Council of Mortgage Lenders.”

The CML has confirmed it is in discussions with the FSA.