A shared appreciation mortgage is where you borrow funds and the mortgage debt is based upon a % of equity in the property that increases in line with growth on the property value.
Lloyds Bank, via it’s subsidiary Bank of Scotland is defending a case bought against them by 150 shared appreciation mortgage holders in the 1990s as an early form of equity release. In one case, legal representatives highlighted a case where back in the 1990’s a house was worth £750,000 and a shared appreciation mortgage (equity release) was taken out for £187,000. The property has now escalated in value to £2.8m and the amount owed has escalated to £1.6m.
Looking at the numbers:
House price growth from £750,000 to £2.8m = 373% growth.
If we do the same for Lloyd’s equity share of the property: £187,000 X 373% = £697,510 but it would appear that by claiming £1.6m equity now of £2.8m, Lloyds must have taken a 57% equity share of the property when releasing the £187,000.
Is this fair?
Property prices have risen dramatically meaning Lloyds profits but the client loses out. Or did they?
Clearly this is disproportionate in size now but Lloyds invested £187,000 as a long term investment with no access whatsoever to that capital. The client has liquid capital and had they invested it in property, they would no doubt have made similar money, but they probably wanted it for shorter term spending or other cash or income needs.
If the roles were reversed and property prices had not increased so dramatically or indeed if property prices decreased, it would be Lloyds that are out of pocket.
Clearly an equitable position needs to be reached for all parties but when you deal with equity release, you need to make sure you take advice and read the small print.
The above scheme was a forerunner to Home Reversion Schemes today. The property owner misses out on future property price growth but has access to cash today and the lender risks property prices falling or may have to wait 10, 20 or 30 years to access their original capital and the growth. To date, we have never recommended a Home Reversion scheme, so perhaps that tells you what we think about property price inflation compared to having a fixed interest rate lifetime mortgage equity release scheme.