A shared appreciation mortgage often abbreviated as "SAM" is a mortgage in which the purchaser of a home shared a percentage of the appreciation in the home's value with the lender. In return, the lender agrees to charge an interest rate that is lower than the prevailing market interest rate. The lender agrees to receive some or all of the repayment of the loan in the form of a share of the increase in value (the appreciation) of the property.
In the UK
A shared appreciation mortgage is a mortgage arranged as a form of equity release. The lender loans the borrowers a capital sum in return for a share of the future increase in the value of the property. The borrowers retain the right to live in the property until death.
Shared appreciation mortgages sold between 1996–1998 have not always turned out to be products beneficial to the borrowers who took them out.
Sales and marketing
About 12,000 shared appreciation mortgages were sold by Bank of Scotland between November 1996 and March 1998 (17 months), and 3,253 were sold by Barclays Bank between May and July 1998 (3 months). They were sold by Bank of Scotland through financial advisers and mortgage brokers, and by Barclays directly to the borrowers. Barclays Bank loaned a total of £98m of shared appreciation mortgages, and so the average size of each of their loans would have been about £30,126. They were mostly aimed at people aged 65 and over, and marketed as ideal for people who had paid off their mortgage, allowing them to release cash tied up in their home without having to sell up.
In 2014, nearly half of the shared appreciation mortgages were still active.
The loan and the repayment
The lender of a shared appreciation mortgage lent a sum of money up to a maximum of 25% of the value of the property. The borrower retained ownership of the property and no repayments were made until the property was sold or the borrower died. At that time the repayment was the original amount borrowed plus a share of the increase in the value of the property. The lender's percentage share was three times the percentage of the value of the property that was originally borrowed. So if the property was sold for less than the valuation, the borrower's percentage share would be further reduced.
Barclays' booklet on shared appreciation mortgages gives an example of a property with an original valuation of £100,000 and a final valuation of £150,000. Therefore if the loan was 75% of the original value of the property, the lender's share of the appreciation would also have been 75%. The interest was paid by monthly instalments, and the final repayment was the original amount borrowed plus the lender's share of the appreciation.
The large repayment amount of a shared appreciation mortgage and the small share of the equity remaining mean that the borrower might not have sufficient money to be able to downsize to a smaller property. The borrower would have less money to pay care home fees, which would require the local authority to make a greater contribution to those fees. And the borrower would have less money to leave to his or her children or grandchildren, some of whom might have been looking after the borrower for many years.
Conversely, in the unlikely event that the value of property had remained the same or reduced, the shared appreciation mortgage would have effectively been interest-free.
Interest rate formula
To calculate the equivalent compound interest rate of a "zero-interest" shared-appreciation mortgage, i.e. the rate of the interest that would have been charged once a month on the amount owing, and added to the amount owing, so that at the end of the term of the loan, the amount owing would be the same as the repayment owing on a shared-appreciation mortgage:
<math>Equivalent \ compound \ interest \ rate = (\sqrt[12t] {\frac{R}{L - 1) \times 1200</math>
which is the same as:
<math>Equivalent \ compound \ interest \ rate = ((R/L)^{(1/12t)} - 1) \times 1200</math>
where is the amount of the repayment, is the amount of the loan, and is the time in years (and part of a year) between the loan and the repayment. The formula gives the equivalent compound interest rate of the mortgage as a percentage.
Alternatively, if it was assumed that the interest would have been charged once a year on the amount owing, and added to the amount owing, the formula would be:
<math>Equivalent \ compound \ interest \ rate = (\sqrt[t] {\frac{R}{L - 1) \times 100</math>
which is the same as:
<math>Equivalent \ compound \ interest \ rate = ((R/L)^{(1/t)} - 1) \times 100</math>
For loans that were 25% of the value of the property, the repayment would normally be 75% of the difference between the initial and final values of the property, plus the amount of the initial loan.
The origin of shared appreciation mortgages
There is a detailed account of the origin of shared appreciation mortgages in chapter 23 of Dr Bettina von Stamm's book Managing Innovation, Design and Creativity, first edition published in 2003 and second edition published in 2008. Chapter 23 is titled "Innovation in Financial Services, Case Study 8: Shared Appreciation Mortgage – Bank of Scotland". This is a précis of the chapter:
The idea – rationale and getting buy-in
Craig Corn, a director in structured finance at Merrill Lynch, was looking for a way to give investors access to one of the largest asset pools, the housing market. This was dominated by owner-occupiers, most of whose wealth was tied up in their homes. Meanwhile, commercial investment in the much smaller private rental sector of the market was hampered by the cost of managing rental property and the difficulty of gaining repossession. Linking an investment to a mortgage would give investors access to the much larger owner-occupier sector of the housing market and enable the owner-occupiers to make financial use of their asset. and the full and final list was unveiled by him in December 1999. He hailed the Millennium Products companies as "the very best of British innovation, creativity and design." The Bank of Scotland shared-appreciation mortgage was described by the Design Council as "A mortgage which allows you to release cash tied up in your house for 0% interest payments, in return for a share in any appreciation in value from the sale of the home." The description does not state the size of the share in the appreciation in the value of the home. By the time the final list of Millennium Products was announced in December 1999, shared-appreciation mortgages were no longer being offered for sale by either Bank of Scotland or Barclays Bank.
SAM products and companies
{| class="wikitable" style="margin-left:auto; margin-right:auto; text-align: center;"
|+ Shared-appreciation mortgage products
! Incorporated !! Company<br />number!! From !! To !! Name !! Status !! SIC
|- style="border-bottom: hidden;"
| 05/10/1995 || 03110558 || 05/10/1995 || 26/04/1996 || REFAL 474 Limited || Renamed ||
|- style="border-bottom: hidden;"
| || || 26/04/1996 || 01/11/1996 || BoS (Shared Appreciation Mortgages) Limited || Renamed ||
|-
| || || 01/11/1996 || || BoS (Shared Appreciation Mortgages) No. 1 PLC || Active || 64921
|- style="border-bottom: hidden;"
| 23/01/1996 || 03149607 || 23/01/1996 || 11/10/1996 || REFAL 485 Limited || Renamed ||
|-
| || || 11/10/1996 || || BoS (Shared Appreciation Mortgages) No. 2 PLC || Active || 64921
|-
| 20/11/1996 || 03281120 || 20/11/1996 || || BoS (Shared Appreciation Mortgages (Scotland)) Limited || Active || 99999
|- style="border-bottom: hidden;"
| 12/03/1997 || 03331868 || 12/03/1997 || 28/04/1997 || REFAL 507 Limited || Renamed ||
|- style="border-bottom: hidden;"
| || || 28/04/1997 || 09/02/1998 || BoS (Shared Appreciation Mortgages (Scotland) No. 2) Ltd || Renamed ||
|-
| || || 09/02/1998 || || BoS (Shared Appreciation Mortgages (Scotland) No. 2) Limited || Active || 99999
|- style="border-bottom: hidden;"
| 12/03/1997 || 03331871 || 12/03/1997 || 17/04/1997 || REFAL 506 Limited || Renamed ||
|-
| || || 17/04/1997 || || BoS (Shared Appreciation Mortgages) No. 3 PLC || Active || 64921
|- style="border-bottom: hidden;"
| 12/03/1997 || 03331873 || 12/03/1997 || 17/04/1997 || REFAL 505 Limited || Renamed ||
|-
| || || 17/04/1997 || || BoS (Shared Appreciation Mortgages) No. 4 PLC || Active || 64921
|- style="border-bottom: hidden;"
| 18/09/1997 || 03436151 || 18/09/1997 || 24/10/1997 || REFAL 513 Limited || Renamed ||
|- style="border-bottom: hidden;"
| || || 24/10/1997 || 09/02/1998 || BoS (Shared Appreciation Mortgages (Scotland) No. 3) Ltd || Renamed ||
|-
| || || 09/02/1998 || || BoS (Shared Appreciation Mortgages (Scotland) No. 3) Limited || Active || 64921
|-
| 24/10/1997 || 03457750 || 24/10/1997 || || BoS (Shared Appreciation Mortgages) No. 5 PLC || Active || 64921
|-
| 24/10/1997 || 03457742 || 24/10/1997 || || BoS (Shared Appreciation Mortgages) No. 6 PLC || Active || 64921
|- style="border-bottom: hidden;"
| 22/10/1990 || 02550646 || 22/10/1990 || 20/10/1993 || BARSHELFCO (No. 41) Limited || Renamed ||
|- style="border-bottom: hidden;"
| || || 20/10/1993 || 20/01/1998 || The Mortgage House Limited || Renamed ||
|- style="border-bottom: hidden;"
| || || 20/01/1998 || 11/05/1998 || BARSHELFCO (TR No. 2) Limited || Renamed ||
|-
| || || 11/05/1998 || || Barclays SAMS Limited || Active || 74990
|}
{| class="wikitable" style="margin-left:auto; margin-right:auto;"
|+ SIC (nature of business, Standard Industrial Classification of Economic Activities) Bank of Scotland merged with Halifax in 2001 to form HBOS (Halifax Bank of Scotland). Lloyds TSB Group negotiated a takeover of HBOS in 2008 and changed its name to Lloyds Banking Group on completion of the takeover in 2009.
Bank of Scotland ("as agent for BOS (SAM) No. 4 PLC") shared appreciation mortgage sales booklet
On page 10 of the BoS SAM No. 4 PLC sales booklet, there is an example of a shared appreciation mortgage based on a loan of £30,000, an initial house value of £120,000, repayment of the mortgage after 20 years, and fees totalling £1,890, and assuming average house price inflation of 4.5% per annum. The APR (annual percentage rate) of this mortgage is 8.7%. The quoted repayment, including the initial loan (£30,000), the shared appreciation (£127,054), the arrangement fee (£500), the legal fees (£600), the valuation fees on entry and exit (£490), and an administration fee (£300), is £158,944.
On page 5 of the same document there is another example of a shared appreciation mortgage. This is based on a loan of £20,000, an initial property value ("base value") of £100,000 and a final property value ("exit value") of £150,000. The quoted repayment, including the initial loan (£20,000) and the shared appreciation (£30,000), but not including the exit valuation fee or the administration fee (£300), is £50,000. This repayment is much less than the repayments that are having to be made on actual mortgages. The example does not give the number of years of the mortgage, but if it is assumed to be 20 years, as in the example on page 10, the average house price inflation of the example is 2.0% and the APR is 4.7%. This example therefore assumes different average house price inflation from the example on page 10. The BoS SAM No. 6 PLC sales booklet is very similar to the BoS SAM No. 4 PLC sales booklet, but most of the example on page 5 has been removed.
The agreement gives an example of a shared appreciation mortgage, based on a total loan of £20,000, an original property valuation of £120,000, property valuation before redemption of £140,000, and repayment of the loan after just two years. The total loan is 16.6% of the original property valuation and the repayment would be (3 × 16.6% × £20,000) + £20,000 = £29,960 (Barclays' figures), i.e. 21.4% of the final valuation. The average house price inflation is 8.0% and the APR is 22.4%. The percentage ratio of the loan to the final valuation, the average house price inflation, and the APR are distorted by the unrealistically short two-year term of the loan. The repayment of £29,960 is much lower than the repayments that are actually being made.
UK House Price Index
In the 20 years before Bank of Scotland started selling Shared Appreciation Mortgages in November 1996, the UK House Price Index increased from £10,682 in October 1976 to £59,885 in October 1996, an increase of 460% (£49,203) and average house price inflation of 9.0% per annum. In the 20 years before Barclays Bank started selling Shared Appreciation Mortgages in May 1998, the UK House Price Index increased from £12,429 in April 1978 to £69,757 in April 1998, an increase of 461% (£57,328) and average house price inflation of 9.0% per annum.
It would have been reasonable to expect the value of property to continue to increase at a high rate. However Shared Appreciation Mortgages were marketed before the widespread use of the internet. Potential customers and their solicitors would not have had easy access to UK House Price Index information, but banks selling mortgages would have had this information.
Regulation
In the 1990s, mortgages were not fully regulated. Banks operated voluntarily under the Banking Code, and mortgage lenders operated voluntarily under the Mortgage Lenders Code. As a condition of operating under the Banking Code, banks had to sign up to the Financial Ombudsman Service, which has legal powers to put things right if customers have been treated unfairly.
Although Barclays Bank and the Bank of Scotland marketed Shared Appreciation Mortgages under their company branding, they set up separate companies to administer and issue the mortgages. These separate companies were not signatories to the Banking Code, and so the Financial Ombudsman Service was not able to investigate customers' complaints about Shared Appreciation Mortgages. The standards of the Code are encompassed in ten key commitments, which include helping customers to understand the financial implications of a mortgage.
The Financial Services Authority (FSA) did not start to regulate mortgage business until 31 October 2004. The FSA was replaced by the Financial Conduct Authority (FCA) on 1 April 2013.
Legislation
The Consumer Credit Act 1974 significantly reformed the law relating to consumer credit.
The Consumer Credit Act 2006 extended the scope of the Consumer Credit Act 1974, created the Financial Ombudsman scheme, and increased the powers of the Office of Fair Trading. It permits borrowers to challenge unfair debtor-creditor relationships in court. Some shared appreciation mortgage customers and their families consider that the arrangement whereby a loan which is 25% of the initial value of a property is repaid by 75% of the appreciation in the value of the property, plus the amount of the loan, could be an unfair debtor-creditor relationship.
The Unfair Terms in Consumer Contracts Regulations 1999, Regulation 7, states that a seller or supplier shall ensure that any written term of a contract is expressed in plain, intelligible language and that if there is doubt about the meaning of a written term, the interpretation which is most favourable to the consumer shall prevail. Regulation 8 provides that an unfair term "shall not be binding upon the consumer", where an unfair term is one which causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer.
Early dissension
In October 1997 Harold Fisher and his wife borrowed £90,000 from Bank of Scotland under its Shared Appreciation Mortgage Scheme. By year three of the loan, Mr Fisher realised that the large increase in house prices meant that their debt to Bank of Scotland had increased by a much greater amount than he had expected. He wrote to the bank to express his fears but they said he had signed the contract.
Mr Fisher then took his claim to the Financial Ombudsman Service, which ruled against him. They said that in shared appreciation mortgage disputes, they usually ruled in favour of the banks.
After The Times reported on Geoffrey Cooke's case in August 2003, they said they were inundated with letters, telephone calls and e-mails from readers who similarly ended up facing crippling debts.
Shared Appreciation Mortgage Victims Action Group (SAMVIC)
As the Financial Ombudsman Service was ineffective, shared-appreciation mortgage customers contacted their Members of Parliament and in 2003 created the Shared Appreciation Mortgage Victims Action Group (SAMVIC), a body of 500 homeowners who felt that they had been deceived by lenders into taking on debts that were now exorbitant,
The Barclays Hardship Scheme would provide an interest-free loan to make up the difference between the amount of money the borrower would have after selling his or her existing home, and the amount of money the borrower would need to buy a new home, up to 50% of the value of the new home. The loan would be repayable on the sale of the new home, which would probably be on the death of the borrower.
The Bank of Scotland did not set up a formal hardship scheme,
Class actions
The Shared Appreciation Mortgage Action Group (SAMAG) was set up in 2009 by Hilary Messer, who was then head of litigation at RWP Solicitors (Richard Wilson Pangbourne), based in Reading, Berkshire. Over 300 shared-appreciation mortgage customers paid £5,000 each, a total of £1.5m, towards legal fees for a class action. Hilary Messer said that recent changes to the Consumer Credit Act made it possible to sue the banks over the mortgages. Under the act, the changes to which were retrospective, if a court determined that the relationship between a creditor and a debtor was unfair to the debtor, it had wide powers to vary the terms of the loan agreement. A legal Letter Before Action was sent to the banks in January 2009. A group litigation order (GLO) was sought at a hearing on 14 July 2009 and it was made in the High Court on 5 October 2009, enabling the shared-appreciation mortgage customers to take legal action as a group against the banks.
The banks appealed against the decision that allowed the case to be heard and, with a different judge, won their appeal. The customers' solicitors needed more money, which the customers did not have, and so they had to withdraw their case. The customers then became liable for the banks' costs.
In June 2021 the solicitors Teacher Stern announced that they had successfully negotiated a settlement with Barclays Bank on behalf of 37 clients who took out shared-appreciation mortgages in the late 1990s. The details of the settlement are confidential.
Teacher Stern LLP represented 160 Shared Appreciation Mortgage Claimants in a case against the Bank of Scotland (part of the Lloyds Banking Group), with a trial that was due to start on 31 January 2024. On the day before the trial was due to start, Teacher Stern posted an agreed statement on their website, saying that the Claimants and Bank of Scotland (and the other Defendants) had agreed a commercial settlement, without any admission of liability, in the County Court action. It said that the terms of the settlement agreement are confidential, and that there are no changes to the mortgages, or their terms and conditions.
More claims against Barclays and Bank of Scotland are being planned by Teacher Stern LLP, Trowers and Hamlins LLP, Clarke Willmott LLP and Acuity Law LLP, except that Clarke Willmott will not be making claims against Bank of Scotland. Clarke Willmott and Acuity Law might offer clients a No Win No Fee arrangement.
Some of the Bank of Scotland shared appreciation mortgages sold between 1996 and 1998 had agreements which were "governed and interpreted in accordance with Scots law." At present, English solicitors are not prepared to make group claims on behalf of customers of Scottish shared appreciation mortgages or their families. When more people have joined the "Scottish SAM" Facebook group, it should be possible for a group claim to be made on their behalf, probably by Scottish solicitors.
Media coverage
As well as many reports concerning shared appreciation mortgages in the national newspapers, there were reports in the August 2003 edition of Which?, the magazine of the Consumers' Association, and in the September 2006 and August 2007 editions of Saga Magazine.
A BBC Inside Out South investigation into shared-appreciation mortgages, presented by Nick Wallis, was broadcast on BBC One on 8 September 2014. One of the people interviewed on the programme by Wallis was Dr Julian Lewis, Member of Parliament for New Forest East in Hampshire.
There was an article written by Ali Hussain about shared appreciation mortgages and published in The Sunday Times on 26 September 2021. It said that there would be a preliminary hearing at the High Court in October 2021 for litigation brought by Teacher Stern, representing 150 Bank of Scotland SAM customers. The action alleges that SAMs were 'fundamentally unsuitable' for consumers and 'inherently unfair' under the Consumer Credit Act 1974. The lead lawyer was David Bowman.
On 4 February 2024 The Sunday Times published an article written by Ali Hussain: "Victory for families whose unfair loans cost them their homes". It says that the Bank of Scotland has backed down at the last minute from defending its sale of an "unfair"equity release scheme (shared appreciation mortgages) in court.
In the US
In commercial mortgages
A shared appreciation mortgage is a mortgage in which the lender agrees to an interest rate lower than the prevailing market rate, in exchange for a share of the appreciated value of the collateral property. The share of the appreciated value is known as the contingent interest, which is determined and due at the sale of the property or at the termination of the mortgage.
For instance, suppose the current prevailing interest rate is 6%, and the property was purchased for $500,000. The borrower puts down $100,000 and takes out a mortgage of $400,000 amortized over 30 years. The lender and the borrower agree to a lower interest rate of 5%, and to a contingent interest of 20% of appreciated value of the property. Because of the lower interest rate, the monthly payment is reduced from $2,398 to $2,147. However, this saving in monthly payments comes with a trade-off. Suppose the property is later sold for $700,000. Because of the agreement on the contingent interest, the borrower must pay the lender 20% of the profit, namely, $40,000.
By participating in the appreciation of the property, the lender takes an additional risk that is related to its value. Hence, whether this is a favorable trade-off depends on the conditions of the housing market. A shared appreciation mortgage differs from an equity-sharing agreement in that the principal of the loan is an unconditional obligation (to the extent collateralized by the property). Thus, if the property's value decreases, the borrower would still owe whatever principal is outstanding, and if the borrower sells the property for a loss, the contingent interest is simply zero.
Revenue Ruling 83-51 (1983) of the Internal Revenue Service specifies conditions under which the contingent interest in a shared appreciation mortgage may be considered tax-deductible mortgage interest. In particular, a shared appreciation mortgage must stipulate an unconditional obligation of payment of principal to avoid being recharacterized as an equity-sharing agreement, which may lead to different tax consequences. Because of the complexity of tax laws and terms tailored for individual situations, private, noncommercial mortgages involving shared appreciation should always be executed with the counsel of a real estate attorney.
In affordable housing (subsidized home ownership)
Shared appreciation clauses are also used by non-profits and local governmental agencies. These shared appreciation loans are structured as second mortgages, but are considered "silent" in that borrowers make no payments until they sell the home (or, in some cases, refinance the first mortgage). At the time of sale or refinance, the family is required to repay the full amount of the loan plus a portion of the home price appreciation. In this way, the amount returned to the subsidizing entity is based on increases in home prices, which helps to preserve the "buying power" of public subsidies.
One common approach to designing shared appreciation loan programs is to base the share of appreciation payable upon sale of the home on the share of the original purchase price that was subsidized.
For example, if a family received a $50,000 subsidy to buy a $250,000 home, the family would be required to give the community 20 percent ($50,000 divided by $250,000) of any home price appreciation at the time of sale, in addition to repaying the initial $50,000.
Additional limitations on the shared appreciation can be placed, such as a usury limitation of a maximum of 6% effective interest on the money lent, as is the case in the down payment assistance offered by the City of Seattle.