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Impacts of shared appreciation mortgage

Shared Appreciation Mortgage (SAM) is the now the biggest cause of a headache to pensioners and their descendants. The scheme started out in the 1980s and early 1990s. It all started with banks offering loans to people who had fully paid off their mortgages. This was an interest-free loan that was not to be repaid in monthly instalments. The lenders could repossess the loan in future after the sale of their houses upon the death of a beneficiary. In addition to the loan, the borrower had to repay the bank 75% of the profit that they made from the sale. The reasoning behind this scheme was that cost of housing would appreciate in future. That is why it was referred to as shared appreciation mortgage.

Initiation of Shared Appreciation Mortgage

Shared appreciation mortgage was a good deal at face value. The borrowers were getting handsome mortgages at no cost. They were not required to pay any instalments. They could live in their homes for years before worrying about the loan. Most banks did not apply any interest to the loan. This did not seem threatening because it was great to have loan without interest at that time, and the borrowers did not have to start repaying immediately after the loan was offered. Everyone saw easy money. A good number of borrowers consulted financial advisers and solicitors before taking the loan. The solicitors and advisers gave them the green light to take the loan. Even the prime minister of the UK at that time was thrilled with the scheme. He dubbed the scheme a Millennium Product. A sample of SAM loans was displayed at the Millennium Dome in London. You can only imagine the smile on everyone faces during the era of SAM.

Woes with Shared Appreciation Mortgage

The smiles of SAM era have now turned into frowns and tears. SAM is now haunting everyone who participated in it. SAM was offered with the condition that it will be repaid upon sale of a house or when the borrower dies. The borrowers are now either very old or dead. The living yet old ones cannot pass their properties to their posterity. If they do this, they will have violated the terms of the SAM. Most of these people cannot repay their loans without selling their properties. If they sell the property, the bank will take so much of their money that they will have nothing left to buy a different house. Given that they are old, they cannot properly take care of these properties.

Imagine a loan of £13000 for a property worth £50 000 in 1991. The property has appreciated in value to £250000. If this property is sold, the bank is entitled to 75% of the increase in value. This is 75% of £ 200000 and will be £187 500. The homeowner must also repay the original loan of £13 000. This means that the bank will get a total of £200,500 for sale of a house worth £250000. The owner will get only £49 500. You cannot buy a house with £49500. Once you sell your property, you are rendered homeless.

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