Borrowers who took out split-appreciation mortgages with Bank of Scotland in the late 1990s are heading to court after negotiations to reach a fairer deal with the bank failed.
Law firm Teacher Stern has been engaged in talks with the Lloyds Banking Group-owned lender since 2016 in a bid to negotiate compensation for customers who agreed to the deals and saw the amount they owed the banks soar. boom as real estate prices rose.
As conversations with Barclays continue, Teacher Stern now says a settlement for Bank of Scotland customers appears impossible, both for those who have already repaid the loans and for those still struggling with huge debts.
The company is asking any remaining customers who have taken out a split appreciation mortgage from Bank of Scotland and wish to be part of the legal action against the bank to contact their team by October 9, 2020.
Four years into talks, case against Bank of Scotland heads to court
Speaking exclusively to This is Money, Teacher Stern’s David Bowman said: ‘The SAMs action group has taken the decision to take legal action against Bank of Scotland’s SAM companies, now wholly owned by Lloyds BankingGroup.
“We are making a final appeal for Bank of Scotland customers with SAM, based in England and Wales, to join the action group no later than October 9, 2020.
“Any interested customer who wishes to benefit from an order made by the court following a finding of unfairness will have to participate on this date.”
He added that customers wanting to be included in the action should contact the company as soon as possible to ensure all paperwork is completed by October 9.
Those not included in the action are unlikely to receive compensation unless the court explicitly decides that its judgment applies to all customers who took out the loans and not just the people bringing the claim.
Borrowers who have taken out shared appreciation mortgages with Barclays are not included in the legal proceedings.
Bowman declined to say why, but it’s likely to mean settlement negotiations with individual borrowers seeking compensation through Teacher Stern are proving more successful than those with a loan from the Bank of Scotland.
The legal action is slow to come. In November 2018, This is Money reported that around 130 borrowers with split appreciation mortgages were planning to take Bank of Scotland and Barclays to court in early 2019.
Those who are not included in the action are unlikely to receive any compensation
This follows more than two years of work by law firm Teacher Stern to build a case against the banks they claim are watertight and strike a financing deal that means borrowers – most of whom are well retirement – don’t lose financially if claim fails.
Negotiations with lawyers for the two banks have dragged on since 2016 after This is Money campaigned for fair treatment of these borrowers, increasing legal costs.
As it stands, there are around 150 active claims against Barclays and Bank of Scotland, the largest number against Bank of Scotland which has been far more aggressive in its marketing of the loans.
What are Shared Appreciation Mortgages?
Borrowers were sold split-appreciation mortgages in the late 1990s to help fund their retirement, but many are now trapped in debt that has soared to many times more than they borrowed.
The cost of a SAM
The owner of a £200,000 house in 1998 would take out a SAM and receive £50,000 in cash. If this house were sold in 2014 for £600,000, the owner would be required to hand over £350,000 to pay off the mortgage, a 600% return to the bank.
If, on the other hand, the same borrower had taken out a normal mortgage of £50,000 and paid interest at, say, 10% (the base rate peaked at 7.5% in 1998) – he would not have repaid only around £104,000 over this period.
The court could decide to force banks to change SAM contracts to reflect the second scenario, meaning borrowers won’t have to pay such astronomical sums.
It could also mean that anyone who has had SAM in the past and has already paid for it is eligible for a refund.
Those who took them out fell victim to house price inflation far beyond all expectations at the time – and instead of seeing the benefit of their home’s value growing, they saw their debts reach punitive levels because of it.
Shared Appreciation Mortgages were sold to borrowers and allowed them to unlock up to 25% of the value of their home in cash, often without interest.
The catch was that when the property was sold, the loan had to be repaid in full, plus up to 75% of any increase in the value of the property.
Thousands of people took out split-appreciation mortgages in the late 1990s with Barclays and Bank of Scotland.
It’s fair to say that most thought they were a bargain at the time, but events since have revealed what a bad product they were.
They have left elderly homeowners trapped and unable to downsize or move into more suitable homes, as their home is now worth many times its value when they took out the loan – and three-quarters of that increase goes to the bank.
The money they have left is not enough to buy a new house.
The banks that sold them, on the other hand, are expected to make a profit beyond anything they had hoped for and yet refuse borrower requests for help despite having themselves been helped to survive the financial crisis. .