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► Equity Release Schemes

This page tells you about Equity Release and Shared Equity Appreciation Schemes and how Joint Equity differs from them.

It is not surprising that we are asked if Joint Equity is similar to Equity Release and the answer is categorically

“we are not in the least like theses schemes.”

And this page will show why we are not and provide the supporting evidence.

► Introduction

A shared appreciation mortgage is a mortgage arranged as a form of equity release. The lender loans the borrower a capital sum in return for a share of the future increase in the growth of the property. The borrowers retain the right to live in the property until death.

Shared Appreciation Mortgages sold between 1996-1998 have not always turned out to be products beneficial to the borrowers who took them out. In the late 90s, Barclays Bank and the Bank of Scotland[1] sold about 11,000 shared appreciation mortgages, targeting pensioners, just before the sharp rises in the property market. Customers could borrow the equivalent of 25% of the value of their property interest free. The banks gain from receiving 75% of the increase in value of the customer's property once it is sold.

The last ten years have seen property prices increase by 3 to 4 times. Many customers who took out a shared appreciation mortgages now find themselves trapped.

An example : a property valued at £100,000 in 1997 is now worth £400,000 (2007).

The client took out a SAM of £25,000 (or 25% of the 1997 value). The contract stated that, upon sale or death, the banks could claim 75% (3 x 25%) of the difference in value plus the original loan (75% x £300,000 + £25,000 = £250,000).

Therefore the bank will receive, upon sale, £250,000 (62.5% of the current value) and the client £150,000. The problem arises when the customer wants to sell up and move home. With only £150,000 to play with, even downgrading to a smaller property half the size of their current house would cost £200,000 and as such would be unaffordable.

Thus, in a market where house prices are rising in the long-term, this type of deal is usually detrimental to the customer[2]. On the other hand, if a customer took out a SAM and house prices stayed steady or declined, the customer would effectively have a completely interest free loan with no downsides. On a 10 year mortgage of £100,000 at 6%, the customer would save £33,225 in mortgage repayments with no loss to the customer.

Many disgruntled SAM customers got together to form the Shared Appreciation Mortgage Action Group (SAMAG). They hope to find a legal settlement for "victims" of shared appreciation mortgages and are pursuing legal remedies.

► Joint Equity and Shared Appreciation Mortgages compared

The table below shows the same house bought with Joint Equity or has Equity Released in 2009 and what the outcome is 10 years later.

The first thing to say is that our Owner-Partner does not have a house just has the deposit, but the Equity Release applicant has a house with no mortgage worth £150,000.

This is a big difference.

The Joint Equity Owner Partner is building their assets but the Equity Release borrower is selling a percentage of thier home and giving away a big (up to 75%) slice of the future gain

By 2019 our Joint Equity Owner-Partner has increased their asset value to £96,507, a gain of around £70,000 (and the Investor-Partner has gained the same amount).

Which averages as about 13.75% Return on Investment (their deposit) a year. And they have a good total sum to put down for their next house.

But the borrower for Equity Appreciation has seen their asset reduce to £142,157, a loss of -£7,843 ( -5.2% loss).

► Conclusion

This comparison makes the differences plain. In fact the only similarity in the two approaches is that they share the word Equity.

Equity Release mortgages and products convert assets to cash at a high cost.and  the sales techniques the providers use are anything but ethical whereas Joint Equity is absolutely ethical both in the investment structure and in how we market our products.

Joint Equity is an alternative to renting for people that would otherwise not be able to buy their own home.

shared appreciation mortgage is a mortgage arranged as a form of equity release. The lender loans the borrower a capital sum in return for a share of the future increase in the