Shared Appreciation Mortgage Overview

A shared application mortgage is one mortgage type, offered in the form of equity release. Borrowers are offered a capital sum, with banks getting a share of the future increase in the value of the property. Borrowers who opt for this type of mortgage are allowed to live in the house until death.

It should be noted that persons who hold a shared appreciation mortgage do not benefit from it in most cases. This is the case with mortgages which sold in the period 1996 – 1998. Two banks, Barclays and the Bank of Scotland sold around 11,000 shared appreciation mortgages, targeting mostly pensioners, before a drastic increase in prices on the property market occurred. Clients were allowed to borrow interest-free and up to 25 percent of their property’s value. Financial institutions profited from receiving 75 percent of the increase in the property’s value once it was sold.

Those who would like the idea of having a shared appreciation mortgage can check with different banks and other financial establishments in the United Kingdom, such as Cahoot, Halifax, Citibank in Britain, Cheltenham & Gloucesterk, HSBC Bank, and others. It is unlikely to be offered this type of mortgage, however, and there are good reasons for this. Barclays, for instance, offered SAMs for a short period in 1998 and discontinued this practice. The mortgage was not allowed to be transferred to another property while home prices rose dramatically. At present, persons who hold a shared appreciation mortgage face financial difficulties, which can be explained with the terms and conditions of this product. Some argue that persons who opted for a shared appreciation mortgage did not fully understand the conditions. Banks claim, however, that all clients were advised that it was best to look for independent advice. Clients’ solicitors have to ensure they understand the scheme and its legal implications.

Generally, shared appreciation mortgages work to the disadvantage of borrowers when property prices are expected to rise in the long run. On the opposite, clients who opted for this type of mortgage when property prices declined or remained steady have an interest-free loan, and there are no downsides. For example, if a borrower takes a 10-year mortgage, at 6 percent, in the amount of 100,000, he will save over 33,000 in mortgage payments. Yet if house prices rise, this will leave the borrower trapped in his home. Elderly borrowers are the ones to suffer the most. For example, they may need to sell their home in order to move to residential care or another establishment, such as a nursing home or assisted living home. If they sell, however, this will trigger a giant payout to the bank, and funds will not be available for them to move.

Obviously, some persons like the idea of having access to cheap money. This is the case when inflation is low and steady. However, if property prices increase, outstanding balances do as well.

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