A shared appreciation mortgage otherwise known as a SAM, refers to a type of equity release mortgage that was offered by Barclays Bank and Bank of Scotland amongst others back in the late 1990′s.
This type of equity release scheme is no longer offered, and has since been replaced with other forms of equity release plan such as a Lifetime Mortgage or Home Reversion Plan.
Definition of a Shared Appreciation Mortgage
Basically, a shared appreciation mortgage is where the lender will loan the homeowner up to 25% of their property value in return for a guaranteed 75% share in the appreciation of the value of the home over time. The homeowner retains the right to live in the home until death, unless they choose to sell before then.
Many would argue now that Shared Appreciation Mortgages were intrinsically flawed from outset, as many homeowners now find themselves unable to move or downsize, which is why the life time home income plan mortgage ( Lifetime Mortgage ) has replaced it as the most popular form of equity release scheme now available.
The problem with appreciation mortgages can be best illustrated by the following example.
A home is worth £200,000. A lender approves a loan of £50,000, which is 25% of the value of the home. There is no interest charged or to pay. However over a five year period the value of the property rises to £400,000, which is a £200,000 increase. The lender is entitled to 75% of that increase (£150,000) as well as the original loan amount, leaving the shared appreciation homeowner with only £200,000 to move with or downsize with, should the SAM be repaid. This means that for those pensioners caught in the trap, moving home is virtually impossible
Here is the breakdown of the math:
Home value at time of loan: £200,000
Home value after 5 years: £400,000
Appreciation of property: £200,000
Lender’s cut: 75% x £200,000 = £150,000 + £50,000 (original loan) = £200,000
£400,000 – £200,000 = £200,000 – profit left for homeowner and/or their family.
In comparison to a Lifetime Mortgage equity release scheme, where the interest is rolled up against the loan, the interest charge over the same 5 year period at a fixed rate of 7% would have been around £20,000 some £130,000 cheaper.
This huge difference has resulted in a number of legal actions being mounted, on the basis that the relationship between the banks and the shared appreciation borrower were unfair, the brochures misleading and some of the loan agreement terms unfair. If successful and the court determines the relationship to have been unfair, the court will have a number of powers available to bring about a variation to the terms of the original loan agreements.
As shared appreciation mortgages, also known as SAMs are no longer available, and for good reason, the alternatives introduced to the equity release market are the range of Safe Home Income Plans known as the Lifetime Mortgage or Equity Release Scheme, and the Home Reversion Plan.