MarkyMarkD
28-08-2003, 18:12
A few years ago, Shared Appreciation Mortgages (SAMs) were all the rage. These were a form of equity release, mainly for the elderly, whereby the customer sold a share of their interest in the increase in value of the property to the lender in exchange for an interest free loan.
The deals commonly worked like this:
House value: £100,000
Interest free loan: £25,000 (25%)
Percentage of future value increases sold to lender: 75%.
So, if the customer lived in the house for 20 years after taking out the mortgage, and then died, and it was sold for £100,000, the amount due to the lender would be £25,000 (annualised interest rate 0.0%)
If it were sold for £200,000, the amount due to the lender would be £25,000 + 75% x £100,000 i.e. £100,000 in total (annualised interest rate 7.2%)
If it were sold for £300,000, the amount due to the lender would be £25,000 + 75% x £200,000 i.e. £175,000 in total (annualised interest rate 10.2%).
The benefit for the consumer is that no payments are required whilst they are alive, and that they always retain 25% of the value of their property to leave to their relatives.
The disadvantage for the consumer, compared to a normal mortgage (for which, of course, most of the customers involved would not be eligible on the basis of age and income), is that there is a risk of the effective interest rate increasing hugely if house prices rise.
The latter scenario has led to huge amounts of whinging by customers who bought this type of deal. There is a website on the subject: Shared Appreciation Whingers' Website (http://www.sharedappreciation.fsnet.co.uk/case.html) and there was an article about it in the Times (http://www.timesonline.co.uk/printFriendly/0,,1-127-787869,00.html) last weekend.
The Times article relates to an individual who is taking his case to the High Court, and reckons that he could achieve a £1.5bn repayment for those who have been "ripped off" by these schemes. This is despite the fact that the Financial Ombudsman Service has not upheld that any of these mortgages were incorrectly sold.
What do I think about it?
People should go into major financial transactions with their eyes open. Mortgages are the biggest single transaction most individuals undertake, and they shouldn't do so lightly.
Everyone taking out one of these mortgages would have been advised by a solicitor. It is the solicitor's responsibility to explain the key terms of the contract to the customer. If the solicitor failed to do so, then the solicitor is negligent and the customer's beef is with the solicitor, not with the lender.
Apparently solicitors may have acted for both the lender and the customer in these cases, or at least been appointed by the lender. None of this negates their duty of care.
Customers who took out fixed rate mortgages at the time these SAMs were taken out, over the sort of terms that were likely for the SAMs, would have paid a fairly high rate of interest. The rates I quoted above, of 7% and 10%, based on capital growth in the house value of 100% and 200% respectively, are not excessive given that the lender was accepting the risk of house prices failing to rise and receiving no interest at all in the meantime.
The whinging customer quoted in the Times has less of a case than anyone else I can imagine.
The figures speak for themselves.
Geoffrey Cooke, 58, and his wife borrowed £72,000 from the Bank of Scotland six years ago under its shared appreciation mortgage (Sam), an equity release scheme marketed at older borrowers who owned their homes but wanted to raise cash. Today, if the Cookes want to redeem the loan, they must pay back £118,800 — the loan, plus £46,800 as an element of the increased value of the property. OK, so they are being asked to pay £46,800 of interest, effectively, on their £72,000 loan. That might sound a lot, but over 6 years that's an effective interest rate of 8.7%.
8.7% was not an unreasonable rate of interest on a 6 year fixed rate loan starting in 1997 - all the more, considering that the lender was accepting a far greater risk than on a normal loan.
There were other disadvantages of SAMs, relating specifically to flexibility regarding moving house after taking out the product, but these are not relevant to this discussion so I've left them out - this post is long enough anyway!
The deals commonly worked like this:
House value: £100,000
Interest free loan: £25,000 (25%)
Percentage of future value increases sold to lender: 75%.
So, if the customer lived in the house for 20 years after taking out the mortgage, and then died, and it was sold for £100,000, the amount due to the lender would be £25,000 (annualised interest rate 0.0%)
If it were sold for £200,000, the amount due to the lender would be £25,000 + 75% x £100,000 i.e. £100,000 in total (annualised interest rate 7.2%)
If it were sold for £300,000, the amount due to the lender would be £25,000 + 75% x £200,000 i.e. £175,000 in total (annualised interest rate 10.2%).
The benefit for the consumer is that no payments are required whilst they are alive, and that they always retain 25% of the value of their property to leave to their relatives.
The disadvantage for the consumer, compared to a normal mortgage (for which, of course, most of the customers involved would not be eligible on the basis of age and income), is that there is a risk of the effective interest rate increasing hugely if house prices rise.
The latter scenario has led to huge amounts of whinging by customers who bought this type of deal. There is a website on the subject: Shared Appreciation Whingers' Website (http://www.sharedappreciation.fsnet.co.uk/case.html) and there was an article about it in the Times (http://www.timesonline.co.uk/printFriendly/0,,1-127-787869,00.html) last weekend.
The Times article relates to an individual who is taking his case to the High Court, and reckons that he could achieve a £1.5bn repayment for those who have been "ripped off" by these schemes. This is despite the fact that the Financial Ombudsman Service has not upheld that any of these mortgages were incorrectly sold.
What do I think about it?
People should go into major financial transactions with their eyes open. Mortgages are the biggest single transaction most individuals undertake, and they shouldn't do so lightly.
Everyone taking out one of these mortgages would have been advised by a solicitor. It is the solicitor's responsibility to explain the key terms of the contract to the customer. If the solicitor failed to do so, then the solicitor is negligent and the customer's beef is with the solicitor, not with the lender.
Apparently solicitors may have acted for both the lender and the customer in these cases, or at least been appointed by the lender. None of this negates their duty of care.
Customers who took out fixed rate mortgages at the time these SAMs were taken out, over the sort of terms that were likely for the SAMs, would have paid a fairly high rate of interest. The rates I quoted above, of 7% and 10%, based on capital growth in the house value of 100% and 200% respectively, are not excessive given that the lender was accepting the risk of house prices failing to rise and receiving no interest at all in the meantime.
The whinging customer quoted in the Times has less of a case than anyone else I can imagine.
The figures speak for themselves.
Geoffrey Cooke, 58, and his wife borrowed £72,000 from the Bank of Scotland six years ago under its shared appreciation mortgage (Sam), an equity release scheme marketed at older borrowers who owned their homes but wanted to raise cash. Today, if the Cookes want to redeem the loan, they must pay back £118,800 — the loan, plus £46,800 as an element of the increased value of the property. OK, so they are being asked to pay £46,800 of interest, effectively, on their £72,000 loan. That might sound a lot, but over 6 years that's an effective interest rate of 8.7%.
8.7% was not an unreasonable rate of interest on a 6 year fixed rate loan starting in 1997 - all the more, considering that the lender was accepting a far greater risk than on a normal loan.
There were other disadvantages of SAMs, relating specifically to flexibility regarding moving house after taking out the product, but these are not relevant to this discussion so I've left them out - this post is long enough anyway!