If you took out a shared appreciation mortgage in the late 1990s you could have suffered financial hardship as a result. But what was so controversial about these mortgages, and what does that mean for today’s equity release plans?
Shared appreciation mortgages were sold between 1996 and 1998, principally by Barclays Bank and the Bank of Scotland, to allow you to release equity from your home without having to move house.
With a shared appreciation mortgage you agreed to give a percentage of the value of your home to the lender when you sell it, in return for a favourable or zero interest rate on a loan.
While they were similar to a lifetime mortgage, as you didn’t have to make regular repayments on the loan, there was a big difference. Rather than a fixed rate of interest, the shared appreciation mortgage required you to commit a percentage of the future value of your home to the provider.
With a shared appreciation mortgage, you could typically borrow up to 25% of the property’s value, either with a fixed interest rate or interest-free, and with nothing to pay back until you sell your property.
With a shared appreciation mortgage you agreed to give a percentage of the value of your home to the lender when you sell it, in return for a favourable or zero interest rate on a loan.
But the main issue with these mortgages arises from an additional clause in the agreement, where you also agreed to pay back 75% of any increase in your home’s price since the original valuation.
This might not have seemed like such a big deal in the 1990s as in March 1995 the average house price in the UK was £55,437. But by March 2023 the average house price had rocketed to £282,548 (UK house price index), which means that a borrower with an average price property would have to pay back around £170,333, in addition to the loan plus any interest.
What had seemed like a good solution at the time now means that some people who took out a shared appreciation mortgage are trapped in their homes, unable to sell as they can’t afford to buy even a smaller property with the equity they would have left when the bank loan is settled.
One couple took out a shared appreciation mortgage with the Bank of Scotland to pay for double glazing. At the time their house was valued at £250,000.
Now it is worth £750,000 and under the loan terms the bank will take 75% of the difference in the prices if it’s sold. During the mortgage selling process, the couple don’t recall the 75% clause being mentioned, but the bank is still expecting their cut, which could be as much as £375,000. That’s a very expensive set of double glazing.
Shared appreciation mortgages were a particularly dangerous early form of equity release before these loans were regulated, and attempts to bring cases against the lenders by people who hold these mortgages have largely been unsuccessful.
While Barclays Bank has offered the victims of shared appreciation mortgages 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 victims unless they were manifestly mis-sold by an independent adviser. If a mortgage was bought from the bank, and the paperwork includes information about the 75% clause, then there is little legal ground to stand on.
As a result of rising property prices, the amount owed to the banks is disproportionate in terms of the money lent, and although the banks have made more money than they could have predicted on these mortgages, they are not passing any of this on to their customers.
Many customers don’t appear to have been warned about what would happen if house prices rose as much as they have done, and as a result they have been left in a very difficult situation.
So what can you do if you have a shared appreciation mortgage that you think may have been mis-sold? In the first instance you could try to make a formal complaint to the bank that offered the loan. If this is unsuccessful the next step is to make a complaint to the Financial Ombudsman Service (FOS).
The FOS can enforce a maximum award of £415,000 for complaints referred after 1 April 2023 about acts or omissions by firms after April 2019, although additional funds might be awarded at the bank’s discretion. If unsuccessful here, you could take professional legal advice.
There have been a number of legal challenges for people affected or for the estates of those people sold a shared appreciation mortgage, but results have been mixed.
The Financial Conduct Authority (FCA) took over the regulation of all forms of equity release in 2013. The FCA replaced the Financial Services Authority (FSA) who regulated equity release from 6 April 2007. Advisers who offer current forms of equity release, the lifetime mortgage and the home reversion plan, must follow the FCA’s rules about equity release, which include taking reasonable steps to make sure a product is suitable for you, taking into account your complete financial status.
In addition to the FCA, the Equity Release Council (ERC) is involved in maintaining high standards for companies involved in equity release, including providers, financial advisers, solicitors and other industry professionals.
Members of the ERC follow both FCA and ERC guidelines, so using providers and advisers who are members of the ERC offers the most safeguards to you to ensure the equity release product you choose is a realistic option for you and your needs.
When looking at your options for equity release, you should only consider products that meet the ERC standards:
Before you take out an equity release plan, you should be told exactly what your equity release plan involves. Terms and conditions, advantages and disadvantages should all be clearly explained, including:
Shared appreciation mortgages are a good example of what happens when equity release goes wrong, but lessons learned from this have been rigorously applied to the equity release market so that future equity release plans are now much better regulated.
Taking out equity release is a major financial commitment, and one that you should fully explore and understand before going ahead. Three main lessons to learn are to always do the following:
1. Get professional advice
2. Explore your alternatives
3. Choose an adviser and provider that are regulated
At Saga, we’ve been fulfilling the personal finance needs of the over 50s for more than 20 years, so we know our customers expect excellent service as well as high-quality products.
At Saga we partner with HUB Financial Solutions Limited to provide Saga Equity Release – a no-obligation, no-pressure advice service dedicated to finding out if equity release is the right choice for you.
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