Shared appreciation mortgages

Since 1997 the average cost of a house in London has increased from around £98,000 to a staggering £580,000. For those fortunate enough to have owned a property since 1997 the return on this investment has been substantial, that is, unless you were unfortunate enough to have been sold a Shared Appreciation Mortgage by Barclays or Bank of Scotland.

In 2016 evidence emerged via a This Is Money investigation that Bank of Scotland rushed older borrowers into hugely expensive mortgages. The Bank of Scotland, previously criticised for sharp sales practices, hurried customers approaching retirement into signing up to shared appreciation mortgages without financial advice.

Years later many of these elderly borrowers are now trapped in unsuitable homes by their substantial debts, some of which have risen 500 per cent on the amount originally borrowed.

It was revealed how Bank of Scotland sold an estimated £750 million of mortgages to older customers and then said it couldn’t help those stuck with them, as the loans were sold on to investors.

At Teacher Stern, we have campaigned publicly for the Banks to change and in 2017 we wrote to hundreds of borrowers outlining plans to force the banks to rip up original contracts and charge a ‘fair and reasonable’ rate of interest on the loans, with the aim of taking the banks to task over these unfair shared appreciation mortgages.

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What is a Shared Appreciation Mortgage?

The Shared Appreciation Mortgage (SAM) was billed by the Banks as one of the best and most generous retirement mortgages on the market. It offered customers the opportunity to release up to 25% of the value of their property. The customer would have to pay a relatively low rate of interest on the loan and borrow up to 75% of the value of the property or it would be completely interest free on the basis of borrowing up to 25% of the value of the property with no monthly mortgage repayments required.

The catch?

When the customer died or sold their property, they had to pay the Bank the total amount borrowed plus a share  of the appreciated value in the property since the loan was taken out, equal to 3 times the Loan to Value Ratio percentage of the loan (or 1x if they paid interest). Typically this amounted to 75% of the growth in the value of a home from 1997/98. Given the substantial rises in the housing market since the late 90s, this has had disastrous consequences for a significant number of policy holders with many being left with insufficient equity to move home or to move to a care home and pay for care.

SAMs have had the effect of trapping elderly clients in their own homes; unable to sell as they are unable to purchase a new property. In addition to the adverse practical impact of the SAM, the financial consequences have meant that clients who released, for example, £40,000 from their home are facing paying back £400,000 to the Bank. The rate of interest payable on a SAM is invariably exorbitant.

Thousands of SAMs were sold by the Banks in a short period of time between 1997 and 1998. The benefits of the SAMs were immediately sold on by way of securitisation to third parties. The price at which the Banks sold the debt to third party investors is likely to have been determined, in part at least, by the view the Banks took of future movements in UK house prices and, in turn, that view will have informed how the securitisation was marketed by the Banks to the third party investors. This is in circumstances where UK house prices had been in a long period of stagnation up to 1998 but which was about to be followed by a decade of substantial rises in the values of domestic property.

Who are our clients?

As the Banks’ customers were only eligible for a SAM if they were aged 60 or over, we are being instructed by clients who were sold a SAM, as well as the Estates of those persons sold a SAM, with a view to challenging the sale of this unfair mortgage product.

The case so far

By virtue of the 2006 amendments to the Consumer Credit Act 1974 (CCA), the Judicial control of unfair credit relationships has been significantly strengthened.

The relationship between the Banks and its SAM customers is likely to be unfair within the meaning of the CCA because of the way that the terms of the Mortgage, regarding payment to the Bank of 75% of the increase in the value of a customers’ property, works to the manifest disadvantage of the customer.

The CCA gives the Court wide powers to amend the terms of the SAM relationship to make it fairer.

It is arguable that SAMs would not survive judicial scrutiny and the Court would ameliorate the position of the customer to provide for a fairer outcome.

Since late 2018 Teacher Stern has been working with clients to advance a claim under the CCA against Barclays and Bank of Scotland. To date this has been done through pre-action correspondence with the Bank. These discussions have had differing results between the banks but the prospect of active litigation is now very much in the offing.

In 2023 Teacher Stern were representing 160 claimants in a case against the Bank of Scotland (part of the Lloyds Banking Group), with trial due to take place in January 2024.

Update 30 January 2024

Media statement:

“The Claimants and Bank of Scotland (and the other Defendants) have agreed a commercial settlement, without any admission of liability, in the County Court action brought by 160 current and former customers who took out Shared Appreciation Mortgages (SAMs).

SAMs were a specialist type of mortgage available in 1997/8, which were either interest free or offered at a fixed rate of interest in return for a share of any increase in property value.

The terms of the settlement agreement are confidential. There are no changes to the mortgages, or their terms and conditions.

Bank of Scotland has a range of measures to support borrowers who may need assistance with their Share Appreciation Mortgages. Customers should contact their bank first and at the earliest opportunity if they are concerned about their finances.”

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