Borrowers who took shared appreciation mortgages with Bank of Scotland in the late 1990s are heading to court after negotiations to secure a fairer deal with the bank failed.
Law firm Teacher Stern has been locked in discussions with the Lloyds Banking Group-owned lender since 2016 in an attempt to negotiate compensation for customers who took the deals and saw the amount they owed the banks soar as house prices rose.
While conversations with Barclays continue, Teacher Stern now says a settlement for Bank of Scotland customers looks impossible, both for those who have already repaid the loans and for those still saddled with enormous debts.
The firm is calling for any remaining customers who took a shared appreciation mortgage from Bank of Scotland and who wishes to be part of the legal action against the bank to contact their team by 9 October 2020.
Four years after negotiations began, the case against Bank of Scotland is heading to court
Speaking to This is Money exclusively, Teacher Stern’s David Bowman said: ‘The SAMs action group has taken the decision to commence legal proceedings against Bank of Scotland’s SAMs companies, now owned outright by Lloyds Banking Group.
‘We are making a final call for Bank of Scotland customers with SAMs, who are based in England and Wales, to join the action group by not later than 9 October 2020.
‘Any interested customer who wishes to receive the benefit of an order the court makes following a finding of unfairness will need to participate by that date.’
He added that customers keen to be included in the action should contact the firm as soon as possible to ensure all paperwork is completed by 9 October.
Those not included in the action will be unlikely to receive any compensation, unless the court explicitly rules that its judgment be applied to all customers who took the loans and not just the individuals making the claim.
Borrowers who took shared appreciation mortgages with Barclays are not included in the legal proceedings.
Bowman declined to comment on why but it is likely this means negotiations for a settlement with individual borrowers pursuing compensation through Teacher Stern are proving more successful than for those with a Bank of Scotland loan.
Legal action has been a long time in coming. In November 2018, This is Money reported that around 130 borrowers who took out shared appreciation mortgages planned to take both Bank of Scotland and Barclays to court in early 2019.
That followed more than two years of work by law firm Teacher Stern to put together a case against the banks they claimed would be watertight and arrange a finance deal that means borrowers – most of whom are well into retirement – don’t lose out financially if the claim fails.
Negotiations with both banks’ lawyers have dragged on since 2016 after This is Money campaigned for fair treatment for these borrowers, ratcheting up legal fees.
As it stands, there are around 150 active claims against both Barclays and Bank of Scotland, with the larger number against Bank of Scotland which was far more aggressive in its marketing of the loans.
What are shared appreciation mortgages?
Borrowers were sold shared appreciation mortgages in the late 1990s to help them fund retirement, but many have now been trapped by debts that rocketed to many times more than they borrowed.
The cost of a SAM
The owner of a £200,000 house in 1998 would sign up to a SAM and be given £50,000 cash. If that house were sold in 2014 for £600,000, the owner would be required to hand over £350,000 to redeem the mortgage – a return of 600 per cent for the bank.
If, on the other hand, the same borrower had taken a normal mortgage of £50,000 and paid interest at, say, 10 per cent (the base rate peaked at 7.5 per cent in 1998) – they would only have paid back around £104,000 over that period.
The court could decide to force the banks to change the SAM contracts to reflect the second scenario, meaning borrowers won’t have to pay such astronomical sums.
It could also mean that anyone who had a SAM in the past and has already paid it back is eligible for a rebate.
Those who took them out are the victims of house price inflation well beyond any expectations at the time – and instead of seeing the benefit of the growth in the value of their home, they have seen their debts grow to punishing levels due to it.
Shared appreciation mortgages were sold to borrowers and allowed them to release a cash sum worth up to 25 per cent of the value of their home, often interest-free.
The catch was that when the property was sold, the loan would have to be repaid in full plus up to an eye-watering 75 per cent of any uplift in value of the property.
Thousands of people took shared appreciation mortgages in the late 1990s from both Barclays and Bank of Scotland.
It’s fair to say most thought they were a good deal at the time, but events since have exposed quite what a bad product they were.
They have left elderly homeowners trapped and unable to downsize or move into more suitable homes, because their home is now worth many times its value when they took out the loan – and three-quarters of that uplift goes to the bank.
The money that is left for them is not enough to buy a new home.
The banks that sold them on the other hand stand to make a profit beyond any they ever expected and yet turn down requests to help borrowers at the same time as having been helped themselves to survive the financial crisis.