Conor Maher
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Date Published:02 Mar 2020 Last Updated:23 Oct 2021

Shared Appreciation Mortgages – An Englishman’s Home is 25% his Castle

Banking & Finance Litigation

Around the mid-1990s, a new form of mortgage began to be offered by Banks, referred to as a Shared Appreciation Mortgage (SAM). Banks offered SAM arrangements to customers as an opportunity to release equity in a property, on a potentially beneficial monthly repayment-free basis. However, many customers have now realised that they are facing the potential of extortionate redemption sums, based on the Bank’s significant shared ownership of the current value of their property.

What is a Shared Appreciation Mortgage?

Under a SAM arrangement, the Bank lends a sum of money (usually around 25% of the total value of the property) on an interest-free basis, in return for a percentage of the appreciation of the value of the property.

During the life of a SAM, the borrower pays no monthly repayments or interest. Instead, upon the sale of the property, the Bank will be entitled to the total of their initial advance, plus the value of the property’s appreciation, usually up to a maximum of 3 times the ‘loan-to-value’ (LTV) ratio (the ratio between the amount lent, and the value of the property at the time of lending).

SAMs were offered for a short period between 1996 and 1998 by Barclays Bank, and Bank of Scotland, as a way of releasing equity in property without monthly repayments.

How does a Shared Appreciation Mortgage work in theory?

For example, a borrower takes out a SAM on a property worth £100,000 in 1996, whereby the bank provides an advance of £25,000 (25% of the LTV). The borrower has the use of the advance sum to do with as he pleases, and pays no monthly repayments or interest throughout the life of the mortgage.

Upon coming to sell the property, some years later, the value of the property has risen to £150,000 (an appreciation of £50,000). In order to redeem the mortgage, the borrower would have to repay the total of the initial advance (£25,000), plus the Bank’s share of the appreciation, namely 3 times the value of the 25% LTV (75%), which would total £37,500 (75% of the £50,000 appreciation).

In this example, the borrower would be liable to pay a total of £62,500 from the sale of the property, in respect of a £25,000 borrowing.

What is the problem with Shared Appreciation Mortgages in practice?

The premise of a SAM as represented to many customers by the Banks was that appreciation would likely be modest. Whilst it was almost certain that house prices would rise, the Banks often failed to advise customers of what would happen in the event that house prices sky-rocket. Unfortunately for many borrowers, house prices did exactly that, and their liabilities under this particular type of mortgage sky-rocketed alongside.

For example, if the same customer took out a SAM in 1996 for £25,000 in respect of a £100,000 property, this property would likely be worth significantly more today. If the property is now worth £700,000, using the same calculations as above, the customer would be liable for a total redemption payment of £470,000.

Clearly, as a result of rising house prices, the value of SAM redemption payments has become grossly disproportionate, and in some cases quite simply prohibitive in respect of customers being able to realise the value of their properties (either by releasing equity, or by downsizing).

How have Shared Appreciation Mortgages been mis-sold?

Many customers were mis-sold SAM arrangements on the basis of the provision of unclear or misleading information from the Banks as to what their potential liability would be in the event of a stark rise in house prices.

The majority of customers were not warned of what would happen in the not unlikely event that house prices rise drastically faster than the market expected, which is exactly what happened in reality.

What options are available if you have been mis-sold a Shared Appreciation Mortgage?

Customers who have been mis-sold SAM arrangements by either Barclays, or Bank of Scotland, may in the first instance be able to raise a formal complaint within the Bank’s respective internal complaints process, with a view to obtaining redress for the mis-selling.

In the event that a successful outcome is not obtained from a complaint to the Bank, customers may be able to raise a complaint to the Financial Ombudsman Service (FOS). In making a complaint to the FOS, customers should have regard to the maximum award which the FOS can enforce, of up to £350,000. However, customers with complaints where the value exceeds £350,000 may still make a complaint, although any award made by the FOS above this limit, whilst persuasive, is discretionary upon the Bank.

Alternatively, customers may consider issuing court proceedings against the Bank in respect of the mis-selling. Due to the significant periods of time involved, customers should obtain professional legal advice from a Banking Litigation specialist at the earliest opportunity, in order to address any potential issues of cases being time-barred.

How can Ellis Jones help you?

Our specialist Banking and Finance Litigation team has substantial experience in dealing with claims against Banks and other financial institutions, and we have recovered in excess of £55 million for our clients since 2012. We can assist you by advising upon, and subsequently progressing, a claim or complaint to recover your losses.

If you believe you may have been mis-sold a Shared Appreciation Mortgage, please do not hesitate to contact Paul Kanolik or William Fox-Bregman in our Banking and Finance Litigation team for a no-obligation initial review of your situation by calling 01202 057733 or by email at banking@ellisjones.co.uk.