It’s equity release that’s keeping me busy these days. Conceptually, I can see why people might do it - it’s a way of accessing your home’s value without selling and downsizing, albeit a very expensive option.
However, I’ve never seen a form of equity release as expensive as a shared appreciation mortgage.
The reality of these mortgages - which in my view should never have been sold - is hitting families all over the country like a bombshell. I’m now acting for a group of claimants against Barclays to try to put things right.
What happened?
Shared appreciation mortgages were sold between 1996 and 1998 by Barclays Bank and the Bank of Scotland as a form of equity release.
Let’s take a closer look at Barclays shared appreciation mortgage.
Those taking out the loan agreed to give a percentage of the value of their property to the lender when they sold it, in return for a zero-interest rate. You could typically borrow up to 25% of the property’s value, with nothing to pay back until you sold your property.
The catch? When the property was sold, Barclays would take back the amount borrowed, as well as 75% of the amount by which the property had increased since the original valuation - in other words, a lot.
What are the consequences?
- Homeowners have been trapped in their homes, unable to sell, as they would be left without enough money to buy any another property.
- Many borrowers can’t pay for care or borrow enough money to adapt the property they’re trapped in to make it more comfortable to live in.
- It doesn’t seem that shared appreciation mortgages were understood, properly or at all in some cases. The borrowers hadn’t realised what they had got themselves into.
Let’s take a look at a specific example
Having borrowed around £22,000 against a property worth £88,000 in 1998, the estate of one homeowner has paid over £290,000 to Barclays in light of the value having increased to £450,000 (i.e. ((£450,000 - £88,000 = the increase in value of £362,000) x 75% = £271,500)) + the capital borrowed of £22,000 = £293,500 payable to Barclays on sale.
It’s the equivalent of borrowing at a rate of around 10% interest compounded annually, which is extremely expensive. And it’s all the more shocking because, in some cases, the money wasn’t even needed and sat in the bank losing money to inflation. Encouraging people to saddle themselves with a shared appreciation mortgage for the sake of a ‘financial cushion’ or, worse, have something in the bank to leave to their children, was poor advice indeed.
Opaque information
What makes it more unfair is that at the time, Barclays will have had access to historic data regarding UK house prices (which had risen on average by over 10% a year in the 20 years before 1998). Despite that, they used a much lower rate in their product literature, which was unfair and misleading. They also had the ability to conduct, or access, the relevant analysis and forecasts of likely future movements in house prices.
The retirees they sold shared appreciation mortgages to, did not have access to that information. In fact, some were encouraged to think it was possible that UK house prices might not rise at all.
In many cases, the reality of these shared appreciation mortgages only come to light when the retirees who were sold them go into care or pass away. It’s a heavy burden for those left behind to deal with, but there is something that can be done.
What’s the solution?
The Financial Ombudsman Service (FOS) can, and has, considered complaints in relation to advice given to borrowers about shared appreciation mortgages - you can read an example here.
However, the FOS is heavily dependent on paper evidence in my experience, so without that, complaints are, in my view, unlikely to succeed. None have as yet, as far as I know. Further, the FOS is restricted by its jurisdiction and cannot consider complaints about the fairness of a product. In addition, both banks set up separate subsidiary companies through which the money was lent (e.g. Barclays SAMS Limited) and, as those companies aren’t regulated, the FOS cannot consider complaints against them.
All is not lost though. The Consumer Credit Act 1974 makes court proceedings possible against Barclays during the life of the shared appreciation mortgage, and within six years of it being redeemed. Those claims are based on there being an unfair relationship between the borrower and lender.
A case against Bank of Scotland in relation to their shared appreciation mortgages recently settled on confidential terms a week before trial, and no other claims appear to have reached court. That may be because there are said to be around 15,000 shared appreciation mortgages out there, and therefore, around 15,000 potential claims should word get out.