In The UK
A shared appreciation mortgage is a mortgage arranged as a form of equity release. The lender loans the borrower a capital sum in return for a share of the future increase in the growth of the property. The borrowers retain the right to live in the property until death.
Shared Appreciation Mortgages sold between 1996-1998 have not always turned out to be products beneficial to the borrowers who took them out. In the late 90s, Barclays Bank and the Bank of Scotland sold about 11,000 shared appreciation mortgages, targeting pensioners, just before the sharp rises in the property market. Customers could borrow the equivalent of 25% of the value of their property interest free. The banks gain from receiving 75% of the increase in value of the customer's property once it is sold, alongside the original loan, which many customers were unclear about.
The last ten years have seen property prices increase by 3 to 4 times. Many customers who took out a shared appreciation mortgages now find themselves trapped.
An example : a property valued at £100,000 in 1997 is now worth £400,000 (2007). The client took out a SAM of £25,000 (or 25% of the 1997 value). The contract stated that, upon sale or death, the banks could claim 75% (3 x 25%) of the difference in value plus the original loan (75% x £300,000 + £25,000 = £250,000). Therefore the bank will receive, upon sale, £250,000 (62.5% of the current value) and the client £150,000. The problem arises when the customer wants to sell up and move home. With only £150,000 to play with, even downgrading to a smaller property half the size of their current house would cost £200,000 and as such would be unaffordable.
Thus, in a market where house prices are rising in the long-term, this type of deal is usually detrimental to the customer. On the other hand, if a customer took out a SAM and house prices stayed steady or declined, the customer would effectively have a completely interest free loan with no downsides. On a 10 year mortgage of £100,000 at 6%, the customer would save £33,225 in mortgage repayments with no loss to the customer.
Many disgruntled SAM customers have got together to form the Shared Appreciation Mortgage Action Group (SAMAG). They hope to find a legal settlement for "victims" of shared appreciation mortgages and are pursuing legal remedies.
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