Ask Annie: They call it equity release but these homeowners are trapped
Sunday 11 May 2008
Q. My parents took an equity release scheme out on their property in 1997 for £15,000, along with an arrangement fee of £2,000.
If they sold their house now, they would have to pay the bank £150,000.
I don't know what to do to help them. They have written to the bank, but have received very short shrift. Are there any pressure groups that may be able to point me in the right direction? TB, Yorkshire
A. You don't give very much detail, but I think your parents have entered into a type of equity release scheme described as a shared appreciation mortgage (SAM).
The SAM seemed a good idea when it was invented. The schemes were first marketed in the mid-1990s and the two main players were Bank of Scotland and Barclays, which together sold about 15,000 of these mortgages.
The bank advanced a proportion of the value of the borrower's property (typically 25 per cent), which it lent interest-free in exchange for the repayment of the capital sum plus 75 per cent of the appreciation in the value of the property when it was eventually sold – either when the borrower moved somewhere else or died.
The deal seemed a good one. You got to live in your own home, possibly until the end of your days, with no worries about repaying a loan or falling prey to rising interest rates.
And you received a tidy sum that you could spend how you liked – on doing up the house, taking a nice holiday or simply supplementing your pension.
If you were likely to stay in your home until you died, the amount it was sold for subsequently could be regarded as pretty much irrelevant – unless you were worried about leaving money to your children. If house prices stagnated or fell you got a fantastic deal: an unlimited-term interest-free loan.
What people reckoned without was the massive and prolonged surge in house prices starting in the late 1990s, coupled with increased longevity. A 75 per cent appreciation in a property's value has come to represent a massive sum of money, hugely disproportionate to the original amount of the loan deal.
Further, because borrowers underestimated how long they would live, and the costs of maintaining their now heavily mortgaged property, they have become more inclined to want to move to other accommodation later in life.
But once an SAM holder decides to move, the modest loan is suddenly transformed into a massive debt that has ballooned in line with property prices. With hindsight, the pace of this rise translates into the equivalent of an annual interest rate of around 17 or 18 per cent.
The result has been that people who took out SAMs have found themselves trapped in properties where they no longer wish to be. They cannot move out without risking becoming homeless because the amount they would have left after paying back the bank does not stretch to purchasing another property.
The plight of SAM customers has become something of a scandal, and there are at least two action groups that may be able to help you.
The Struggle Against Financial Exploitation (Safe) can be found online at www.safe-online.org or you can call 0208 630 9990 for more information. The Shared Appreciation Mortgages Action Group (SAMAG) can be contacted at www.samag.wanadoo.co.uk.
The good news for Barclays borrowers is that the bank has set up a rescue scheme to help customers in extreme hardship. The deal allows SAM borrowers to retain all the price appreciation from the sale of the mortgaged property – which they would otherwise have had to hand over to the bank – to put towards a new home.
This deal amounts to an interest-free loan to the borrower that has to be repaid only when the second property is sold or the customer dies.
There has been less success with Bank of Scotland, which has been dragging its heels over accommodating borrowers in difficulty.
Elaine Williams, spokeswoman for Safe, says the pressure group has been in talks with Bank of Scotland for some months and is hoping a similar deal can be agreed. She comments: "Many of our members are in real hardship."
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