The UK property market has developed a weird kind of circularity. People work for decades to pay off the biggest home loan they can afford. Then, as soon as they finally own that pile of bricks outright, they take another loan to extract cash from it.
Just Group, a pioneer in so-called lifetime mortgages, has been riding the trend since the mid-2000s. A typical customer of the UK-based insurer might be Mrs Miggins, 70, who borrowed 30 per cent of the value of her home at a 5.5 per cent annual rate of interest. By year 22, if Mrs M were still alive, accrued interest would have pushed that loan up to 100 per cent of the original value. Thanks to a “no negative equity” guarantee, the lender would take the hit if the property were to be sold for less.
The UK’s Prudential Regulation Authority has been warning for a while that lenders need more capital to account for the risks of serious house price falls. On Monday, the regulator revealed a policy that was much milder than Just Group’s management had feared, allowing a 13-year transition period. Shares in the company leapt more than 20 per cent, a record daily gain.
Just Group fought its corner well. The PRA has reached an industry-friendly conclusion. It should also satisfy the government, which worries people have not saved enough for retirement.
But if there is a lesson for Just Group, it is in the need to diversify. Share prices of rival lifetime mortgage providers such as Legal & General and Aviva barely moved during the PRA’s deliberations, as less than 5 per cent of their assets would have been affected. At Just Group, the figure is 38 per cent.
Chief executive Rodney Cook should reflect on the fact that the company was wounded three years ago by reforms to UK annuities, a big part of its business. Today, Just Group’s stock price is about one-fifth more sensitive than peers to market movements. Lifetime mortgages have become a growth business, up 40 per cent last year to £3.1bn. But Just Group badly needs more strings to its bow.
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