What is a Shared Appreciation Mortgage?
- A shared appreciation agreement charges low (or sometimes 0%) interest.
- Top Tip: Beware of 'interest-free' offers, you could end up paying your lender three times as much when coming to sell the property.
- The borrower shares a percentage of the appreciation of the home's value with the lender.
- It is possible to get out of a shared appreciation mortgage with a 'phase out' clause.
What is the purpose of a shared appreciation mortgage (SAM)?
The purpose of a 'SAM' is to reduce the borrower's monthly mortgage outgoings versus a regular mortgage. They are often low or zero-interest loans, with deferred repayment.
Commonly, they are used by homeowners for equity release, (paying little or nothing until they sell or refinance their home) or by investors, to finance a new property development (paying little or nothing on the mortgage while they renovate, then sharing a tiny fraction of the profit with the lender on sale).
What is a shared appreciation agreement?
The terms of the shared appreciation agreement can vary but are all based on two main principles:
- 1
You, the Borrower, pay a lower market interest rate, often significantly below the prevailing market interest rate, which can offer substantial financial benefits over the life of the loan.
- 2
The Lender gets a share of the ‘appreciation’ (that’s the increase in the value of the property)
This percentage is agreed upon upfront and the fixed rate is payable when the property is sold, refinanced, or the owner dies.
It is referred to as ‘contingent interest’ as it is essentially ‘interest’ in the form of a small proportion of appreciated value, which is ‘contingent’ (dependent) on the prevailing market interest rate and the value of the property increasing over time.
You'll still have to pay back the loan itself, but this can be deferred until the property is sold or refinanced.
Can you get out of a shared appreciation mortgage?
Some 'SAM' agreements include a phase-out clause which can reduce, or phase out over time, the percentage of the appreciated value that is paid to your lender, sometimes to a flat 0% interest rate.
This is intended to encourage you to repay the mortgage, instead of selling and splitting the appreciation with the lender. Ideally, you'll owe nothing by the time you sell the property.
Another variation on the phase-out clause best suits homebuyers who intend to stay put for a little while and then move. You only pay the lender a percentage of the shared appreciation if you sell within the first 5 years (usually 25%).
If you sell after 5 years, you repay the loan plus interest and keep the appreciation in property value for yourself.
If you feel that you may have been mis-sold a shared appreciation mortgage, you could try to make a formal complaint to the bank that offered the loan. If that is unsuccessful, the next step to take is to make a complaint to the Financial Ombudsman Service (FOS).
The FOS can intervene and enforce a maximum amount of £415,000 for complaints referred after 1st April 2023 regarding actions or omissions by firms that happened after April 2019.
You can make this complaint yourself, it's a free service and you won't need legal representation. Additional funds may be awarded at the bank or lender's discretion.
If the FOS is unable to help you, the best course of action is to take professional legal advice. The Consumer Credit Act 1974 makes court proceedings possible against the lender or bank during the life of the shared appreciation mortgage and within six years of it ending. However, results have been mixed in legal challenges for mis-sold shared appreciation mortgages.
What happens at the end of a shared appreciation mortgage?
If you remain in the property after the mortgage term is ended, nothing happens until you sell the house. When you want to sell or refinance the property, you must repay any outstanding debt from the house with the proceeds.
This will include whatever is left of the original loan amount, plus the lender’s share of the property’s appreciation.
It's important to note that the appreciation value is often calculated based on historical data, such as the UK House Price Index, providing insight into how property values are assessed over time.
If a fixed interest rate has been paid throughout, this will be 1x the loan-to-value ratio percentage (LTV), but if there was no interest paid during the term of the loan, this will be 3x the loan-to-value ratio (which means a lot more than what was ever originally borrowed!)
How does the 3x LTV 'SAM' agreement work out in the long run?
If you buy a house with a 20% deposit and borrow the rest, the loan-to-value ratio is 80%. If you took just a 25% SAM and paid no interest during the mortgage term, you would have to repay 75% of the value of your home loan after the appreciation (3x 25%) on sale.
For example, if you took a 25% shared appreciation agreement on an average-priced house in 1995 (£56,000), you would have released £14,000 (£56,000 x 0.25) in cash.
If you sold an average-priced house in 2023 (£290,000) and had to pay 75% of the value of the appreciation at £234,000 (£290,000 - £56,000), you would have to pay £175,500 (£234,000 x 0.75) on sale, on top of repaying the original £14,000 loan.
Such significant increases in repayment obligations can lead to financial hardship for homeowners, especially those who took out SAMs in the 1990s, facing the severe financial burdens these mortgages can impose over time.
What if the property's appreciated value is lower than I thought?
There is an overall trend of house prices rising, even recovering from the 2008 crash by 2012. So the debt on a shared appreciation mortgage will almost certainly rise significantly over time.
If property prices fall, your lender might offer you a mortgage modification to reduce your debt in line with the lower value.
What are the disadvantages of shared appreciation mortgages?
The more the property appreciates, the more you'll have to pay your lender
This is normally fine over the short term, but as you can see from the example above, where property prices rise significantly over time you can end up paying far more than you borrowed.
Beware of 'Interest-Free' offers
The percentage of the appreciation value that you'll have to pay your bank or lender depends on whether you pay interest on the loan, or not. You might be tempted by a 0% interest rate offer, wanting to limit your monthly outgoings as much as possible.
Beware though, this could mean you have to pay your lender three times as much money when you come to sell the property.
In the 90's...
Shared appreciation agreements which were granted in the '90s had major disadvantages. Policyholders had to pay 75% of the growth in the value of their home and this effectively trapped people in their properties, unable to afford to finance another purchase or move into a care home with the sale of their property.
Due to the vast increase in property prices and the interest rates charged, some of these debts have risen by 500%.
They were sold as equity release options to older borrowers who needed to top up their pensions and were encouraged by financial advisers to take out a shared appreciation loan without proper legal advice.
A This is Money investigation revealed that older borrowers were rushed into hugely expensive mortgages. The bank then sold those debts on to investors and therefore said they were unable to help borrowers.
In response to the significant number of financial difficulties faced by borrowers, the Barclays Shared Appreciation Mortgage (SAM) Hardship Scheme was introduced, offering a specific case of the broader issues discussed here.
Should I get a shared appreciation mortgage?
Shared appreciation mortgages can be a great financing option in specific circumstances.
Use an impartial mortgage broker
Explain your personal finance needs to an impartial mortgage broker as they have access to the whole of the market and will be able to recommend products to suit your needs.
Opt to pay monthly interest
If you opt for loans with a '0% interest rate' shared appreciation agreement, you'll pay a much higher percentage and more money to your lender at the end. Always opt for loans with a product or loans where you pay monthly interest if you possibly can.
Use shared appreciation mortgages as short-term financing only
The longer you wait to sell or refinance the property, the greater the likely increase in value and the greater the amount payable to the lender.
Get independent legal advice
You should make sure you fully understand the benefits and risks of the mortgage product and get professional advice on the terms of your shared appreciation agreement before you sign.
Given the complexity and potential legal implications, especially in light of legal actions involving customers and institutions like Lloyds Banking, it's crucial to seek legal advice.
This is particularly important considering the involvement of Teacher Stern LLP in representing claimants in a case against Bank of Scotland, part of the Lloyds Banking Group, where the settlement agreement had confidential terms with no admission of liability.
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
