Buyers want to believe that they’ve picked a good property, that its value will increase over the course of their acquisition, and that their borrowing will decrease as they pay off the loan.
But a large group of borrowers who took out loans after collapsing house prices are now paying the price for not considering what years of rising prices could cost them with a âshared appreciation mortgageâ.
In the late 1990s, up to 15,000 homeowners took out loans from the Bank of Scotland (BoS), now owned by Lloyds Banking Group. Some of them are now facing debts of over Â£ 1million, a multiple of the value of their property at the time they borrowed the money.
A case brought by more than 200 of these owners is due to be heard by the High Court in London. This demonstrates the vital need for homeowners to take appropriate independent advice when obtaining a loan on their home. Although the circumstances of the case are specific, the result could set a precedent for other borrowers.
The loans were sold by commission brokers, some of whom were bank employees. The money was primarily intended to pay for home renovations or improvements. Instead of paying interest, the borrowers agreed to repay the principal and pay part of the appreciation in their home when they sold it, moved into a retirement home, or died.
A couple have taken out a Â£ 175,000 loan on their Â£ 750,000 home in Islington, north London. Twenty-five years later when the widower wanted to downsize he was told it was worth over Â£ 2million and therefore owed Â£ 1.6million. He didn’t have enough value left to move to a smaller property.
David Bowman, lawyer at the law firm Teacher Stern, which represents the owners, said: âWe believe this was an exorbitant credit matter and that the relationship between the borrower and the lender was unfair. If the court agrees, it can rectify this injustice by writing off the loans or changing the terms of the product to something fairer.
Bowman said the Bank of Scotland has sold two main types of split appreciation mortgages. With the first type, borrowers did not pay monthly interest and there was no fixed term. Without a minimum age for the borrower, interest could therefore accumulate over 40 years and more.
Borrowers could borrow up to 25% of the value of their home. When the loan was repaid, the borrower had to pay the original loan plus a proportion of the appreciation of the property which, expressed as a percentage, was three times the loan-to-value ratio of the original loan.
The second type allowed borrowers to borrow 75 percent of the value of the home, and then they paid an interest-free mortgage payment each month. The borrowers then had to repay the loan and a share of the capital gain equivalent to the loan / value ratio of the initial loan.
When the loans were taken out, the interest was a small discount on the Bank of Scotland’s regular mortgage rates. But as the Bank of England‘s base rates fell below 6 percent in February 1999, mortgages were no longer competitive. Average house prices have increased by more than 350 percent since the loans were first offered.
Teacher Stern has previously represented 37 homeowners, who took out similar âshared appreciationâ loans from Barclays in the 1990s. Barclays settled his claims out of court this year with a confidential settlement.
Bank of Scotland said: âShared appreciation mortgages were a type of specialized mortgage available in 1997/8 that were either interest free or offered at a lower interest rate in exchange for a share of the value of increased ownership. We recommended that borrowers take financial counseling to ensure they understand the product, is suitable for their needs, and that all borrowers are counseled by their own lawyer. We are unable to comment on individual cases due to pending litigation, but we do everything reasonably in our power to assist any customer facing financial difficulty. “
Sarah Bourne, a Teacher Stern client, is pursuing a case on behalf of her late father and elderly mother. She said: ‘My father took out the Â£ 62,500 shared appraisal loan with Bank of Scotland in 1997 on his house in Sevenoaks. He . . . borrowed to help cover living expenses and to modernize a very run down old kitchen. He also wanted to pay off the original mortgage of Â£ 9,000.
When the work was completed, the Â£ 225,000 house was revalued to Â£ 235,000 by the BoS and is now worth Â£ 1.2million or more. Bourne says, âMy mother would like to move to a smaller house in her hometown. If she sells for Â£ 1.2million after deducting Â£ 235,000 there would be an appreciation of Â£ 965,000 and with the original Â£ 62,500 she would owe Â£ 786,250. That would leave him Â£ 178,750, which is not enough to buy a new house. “
For homeowners today, there is another way to fundraise homes while still living there, but caution is always in order. Parole loans for those over 55 allow homeowners to borrow against the value of their home without making a payment until they sell their home, move into a nursing home, or die.
Historically, these loans had a bad reputation because some homeowners ended up owing more than the value of their home, but rules introduced in 2004 better protect borrowers.
Jim Boyd, Managing Director of the Equity Release Council, said: âShare-appreciation mortgages, which were sold in the 1990s, should not be confused with equity release products, such as loans. life mortgage or housing reversion plans, which are based on a different proposition. and come with built-in protections for consumers.
Historically low mortgage rates and rising house prices make freeing up equity attractive today, but any borrower needs to be sure they understand the details. As the sad history of shared appreciation mortgages shows, problems can arise years later.
Lindsay Cook is co-author of âMoney Fight Club: Saving Money One Punch at a Time,â published by Harriman House. If you have a problem with the Money Mentor, send an email [email protected]