Since 1997 the average cost of a house in London has increased from around £98,000 to a staggerin £580,000. For those fortunate enough to have owned a property since 1997 the return on this investment has been substantial, that is, unless you were unfortunate enough to have been sold a Shared Appreciation Mortgage by Barclays or Bank of Scotland (BOS) ('the Banks”).
The Shared Appreciation Mortgage ('SAM”) was billed by the Banks in 1997/1998 as one of the best retirement mortgages on the market. In a nutshell, it offered customers the opportunity to release up to 25% of the value of their property. The customer would have to pay a relatively low rate of interest on the loan or it would be completely interest free, with no monthly mortgage repayments required. The catch? When the customer died or sold their property, they had to pay the Bank the total amount borrowed plus 75% of the appreciated value in the property. Given the substantial rises in the housing market since 1997/1998, this has had disastrous consequences for a significant number of our clients with many being left with insufficient equity to move home or to move to a care home and pay for care. SAMs have had the effect of trapping clients in their own homes; unable to sell as they are unable to purchase a new property. In addition to the adverse practical impact of the SAM, the financial consequences have meant that clients who released, for example, £40,000 from their home are facing paying back £400,000 to the Bank. The rate of interest payable on a SAM is invariably exorbitant.
Thousands of SAMs were sold by the Banks in a short period of time between 1997 and 1998. The benefits of the SAMs were immediately sold on by way of securitisation to third parties. The price at which the Banks sold the debt to third party investors is likely to have been determined, in part at least, by the view the Banks took of future movements in UK house prices and, in turn, that view will have informed how the securitisation was marketed by the Banks to the third party investors. This is in circumstances where UK house prices had been in a long period of stagnation up to 1998 but which was about to be followed by a decade of substantial rises in the values of domestic property.
As the Banks’ customers were only eligible for a SAM if they were aged 60 or over, we are being instructed by clients who were sold a SAM, as well as the Estates of those persons sold a SAM, with a view to challenging the sale of this unfair mortgage product.
So, what can be done?
Firstly, by virtue of the 2006 amendments to the Consumer Credit Act 1974 (CCA), the Judicial control of unfair credit relationships has been significantly strengthened. The relationship between the Banks and its SAM customers is likely to be unfair within the meaning of s.140(1)(a) of the CCA because of the way that the terms of the Mortgage, regarding payment to the Bank of 75% of the increase in the value of a customers’ Property, works to the manifest disadvantage of the customer. S.140 (b) CCA gives the Court wide powers to amend the terms of the SAM relationship to make it fairer. It is arguable that SAMs would not survive judicial scrutiny and the Court would ameliorate the position of the customer to provide for a fairer outcome.
Secondly, the provisions of the Unfair Terms in Consumer Contracts Regulations 1994 can also be invoked to challenge the enforceability of the SAM on the basis of the language used in the sales documentation that accompanied SAMs.
We are currently having significant success in challenging the terms of these Shared Appreciation Mortgages.