A group of over 300 homeowners has this week won the right to take legal action against Barclays and Bank of Scotland over their Shared Appreciation Mortgages, having been granted a Group Litigation Order by the High Court.
Shared Appreciation Mortgages (SAMs) are one of the most notorious financial products of the last decade. Launched in 1996, they were only available for a short period of time before being withdrawn in 1998 and were only available from Barclays and Bank of Scotland. SAMs were aimed at asset-rich, cash-poor individuals who wanted to release equity from their home and were predominantly sold to retirees – the average age of applicants was around 69.
They worked by releasing equity to borrowers in the form of a lump sum – the maximum amount that could be released was 25% of the value of the property. No interest accrued on the loan and no repayments were made. Instead, the borrower agreed to pay back the original amount borrowed, plus three times the percentage borrowed of any increase in the value of the property. This was settled either when the property was sold or on death.
With the benefit of hindsight, it doesn’t take a rocket scientist to see how problems arose, particularly when you consider that there was no upper limit on the bank’s share in the rise in the equity. Anyone who has owned a property since 1996-1998 will know exactly how well house prices have done since then (despite recent falls) and will probably have a very big smile on their face. That is unless they promised to hand over 75% of that gain to their mortgage lender.
The end result is that hundreds of borrowers have been effectively trapped in their homes – unable to raise enough money to move to a new home, once the bank has taken its share. Through action groups SAFE (Struggle Against Financial Exploitation) and SAMAG (Shared Appreciation Mortgage Action Group), homeowners have been battling for some time and this latest ruling is a sign of progress although I’m sure there’s still a long way to go.
Once the case gets to court, I’m sure there’ll be lengthy arguments over who is to blame – did the customers know what they were getting into (at a time when house prices were fairly flat)? Did the banks mislead them and/or play down the potential risks involved? RWP Solicitors, the firm handling the group case, is seeking a reduction in the percentage of the appreciation that is payable to the banks, or a cap or limitation on the amount payable to the banks as their share.