Thousands of holders of controversial shared appreciation mortgages (SAMs) have been told they can club together to take on the banks that sold them in court in a US-style class action.
The schemes saw Barclays and Bank of Scotland offering low – or zero – interest loans on homes while taking up to 75 per cent of the increase in value of those homes when the mortgages were repaid. They were hugely popular when sold in 1997 and 1998 before the property boom got under way. Now, however, those who took them out often find themselves trapped in their homes and unable to move.
For example, a homeowner who borrowed £25,000 at a zero rate of interest on a house worth £100,000 then would have to pay back £175,000 on redemption if the home was worth £300,000 today. That is made up of the original £25,000 plus £150,000, 75 per cent of the £200,000 increase in value.
Hilary Messer, of RWP Solicitors, who is leading the case said the steep rise in house prices in the 10 years between 1997 and 2007 has meant that with zero-interest SAMs the lender's share of the appreciation is now an average of 4.4 times the amount borrowed, equivalent to an average interest rate of 35-40 per cent a year.
She said that many of these mortgages were taken up by older people, who now find themselves trapped in properties which are no longer suitable for them, as they do not have the equity to sell up and buy a suitable smaller property.
Ms Messer said yesterday: "This is a significant victory. The High Court ruling means we now have a Group Litigation Order (GLO) so many cases can be heard together. This is the only way ordinary householders could afford to take on a high street bank.
"What is imperative is that people affected get in touch. There is a 12-year limitation on cases and people need to register to get this suspended."
Some 12,000 such SAMs are thought to have been sold in the UK, of which 7,000 have yet to be redeemed. Ms Messer is hopeful that the mortgages will be wiped out under the unfair terms in consumer contract regulations of 1994. Alternatively, she will try to use the 2006 amendments to the Consumer Credit Act of 1974 to either reduce the amount the banks can take or impose a cap, similar to the way the products worked in the US.
However, the banks could still appeal. A Barclays spokesperson said: "The issuing of the Group Litigation Order yesterday was only the first step in the litigation being brought by the SAMs claimants. The GLO merely formalises the procedure which the claimants are now to follow and does not involve any decision on any of the major issues in the case. There has been no adverse finding whatsoever against Barclays – we consider that the case is without merit and we will defend it vigorously in the courts."
Bank of Scotland said: "We believe the terms of the mortgages were clear to customers when they took out their loan but we recognise that the arguments the SAMs borrowers wish to raise should be brought before a court as quickly and efficiently as possible. However, given the very different circumstances of the individual borrowers, the Bank does not believe that the 'one size fits all' nature of a Group Litigation approach is appropriate. The Bank is therefore currently considering its options." Bank of Scotland, now part of Lloyds, said it would act sensitively in cases of hardship.