The dangers of shared appreciation mortgages

A reader writes:

Years ago my late husband took out a shared appreciation mortgage (SAM) with the Bank of Scotland when we needed money for double glazing.

At the time our house was valued at £250,000. Now it is worth £750,000 and the bank would take 75% of the difference in the prices under the loan terms if I sold it.

I suppose, when the loan was taken out, no one could have foreseen the terrific rise in house prices. But I am sure 75% was not mentioned. Is there anything at all that I can do?

Annie Shaw replies:

This is an object lesson about the downside of releasing cash from the value of your home at a relatively young age while you remain living in it.

Shared appreciation mortgages were a particularly dangerous early form of equity release before these loans were regulated.

Sold by just two banks – Bank of Scotland and Barclays – they were marketed only briefly between 1996 and 1998, but thousands were taken out.

Equity release is now regulated

Nowadays there are many more safeguards in place for equity release, and it can be a useful tool in retirement planning. It should, however, always be a last resort, and a house move is nearly always preferable, particularly for younger retirees.

Anyone who thinks they can’t face a house move now should try to imagine how they would feel in 10 years’ time, perhaps when they are in poorer health or sadly widowed as you are, but forced to move by other circumstances, such as maintenance costs.

Read our guide to downsizing

It is true that some equity release loans are ‘portable’, but many are not. Even when it is possible to transfer the loan to a new home, the property you have in mind, such as sheltered accommodation, may not qualify under the scheme.

What can you do?

As for your situation, while Barclays has offered SAMs victims in hardship some assistance, Bank of Scotland has shown itself to be less accommodating.

The Financial Ombudsman Service has generally failed to uphold cases brought by SAMs victims unless they were manifestly mis-sold by an independent adviser.

If your husband bought directly from the bank, and the paperwork indicates that he knew what he was doing, you are probably out of luck.

If Bank of Scotland ultimately refuses to help you, it could still be worth talking to a mortgage broker or an equity-release specialist about interest-only home loans aimed at older people.

You could also consider moving into rented accommodation. Very much depending on where you live, it could be surprisingly affordable and even a shrewd financial manoeuvre, particularly when it comes to benefits (should you qualify) and inheritance and care fees planning.