A man in a suit climbs a trajectory of appreciation over houses increasing in size. SAM Conveyancing explains: What is a shared appreciation mortgage?
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What is a Shared Appreciation Mortgage?

13/04/2023
(Last Updated: 14/04/2023)
138
6 min read

Key Takeaways

  • A shared appreciation agreement charges low (or sometimes 0%) interest
  • The borrower shares a percentage of the appreciation of the home's value with the lender
  • It is possible to get out of a shared appreciation mortgage with a 'phase out' clause

What is the purpose of a shared appreciation mortgage (SAM)?

The purpose of a 'SAM' or shared appreciation agreement is to reduce the borrower's monthly outgoings versus a regular mortgage. They are often low or zero interest, with deferred repayment.

Commonly, they are used by homeowners to release equity, (paying little or nothing until they sell or refinance their home) or by investors, to finance a property development (paying little or nothing on the mortgage while they renovate, then sharing the profit with the lender on sale).

What is a shared appreciation agreement?

The terms of the shared appreciation agreement can vary but are all based on two main principles:

    1

    You, the Borrower, pay lower than market interest rates.

    2

    The Lender gets a share of the 'appreciation' (that's the increase in the value of the property)


This percentage is agreed up front and is payable when the property is sold, refinanced, or the owner dies. It is referred to as 'contingent interest' as it is essentially 'interest' in the form of appreciated value, which is 'contingent' (dependent) on the value of the property increasing over time.

You'll still have to pay back the loan itself, but this can be deferred until the property is sold or refinanced.

Can you get out of a shared appreciation mortgage?

Some shared appreciation agreements include a phase out clause which can reduce, or phase out over time, the percentage of the appreciation value that is paid to your lender, sometimes to 0%. This is intended to encourage you to repay the mortgage, instead of selling and splitting the appreciation with the lender. Ideally, you'll owe nothing by the time you sell the property.

Another variation on the phase out clause best suits homebuyers who intend to stay put for a little while and then move. You only pay the lender a percentage of the shared appreciation if you sell within the first 5 years (usually 25%). If you sell after 5 years, you repay the loan plus interest and keep the appreciation value for yourself.

What happens at the end of a shared appreciation mortgage?

If you remain in the property after the mortgage term is ended, nothing happens until you sell. When you want to sell or refinance the property, you must repay any outstanding debt from the proceeds. This will include whatever is left of the original loan amount, plus, the lender's share of the property's appreciation.

If interest has been paid throughout, this will be 1x the loan to value ratio percentage (LTV), but if there was no interest paid during the term of the loan, this will be 3 x the loan to value ratio (which means a lot more than what was borrowed!)

How does 3 x LTV shared appreciation agreement work out in the long run?

If you buy a house with a 20% deposit and borrow the rest, the loan to value ratio is 80%. If you took just a 25% SAM and paid no interest during the mortgage term, you would have to repay 75% of the value of the appreciation (3 x 25%) on sale.

For example: If you took a 25% shared appreciation agreement on an average priced house in 1995 (£56,000), you would have released £14,000 (£56,000 x 0.25) in cash. If you sold an average priced house in 2023 (£290,000) and had to pay 75% of the value of the appreciation at £234,000 (£290,000 - £56,000), you would have to pay £175,500 (£234,000 x 0.75) on sale, on top of repaying the original £14,000 loan.

What if the property doesn't appreciate?

There is an overall trend of house prices rising, even recovering from the 2008 crash by 2012. So the debt on a shared appreciation mortgage will almost certainly rise significantly over time. If property prices fall, your lender might offer you a mortgage modification to reduce your debt in line with the lower value.

What are the disadvantages of shared appreciation mortgages?


The more the property appreciates, the more you'll have to pay your lender

This is normally fine over the short term, but as you can see from the example above, where property prices rise significantly over time you can end up paying far more than you borrowed.

Beware 'Interest Free' offers

The percentage of the appreciation value that you'll have to pay your lender depends on whether you pay interest on the loan, or not. You might be tempted by an interest free offer, wanting to limit your monthly outgoings as much as possible. Beware though, this could mean you have to pay your lender three times as much money when you come to sell the property.

In the 90's...

Shared appreciation agreements which were granted in the 90's had major disadvantages. Policy holders had to pay 75% of the growth in the value of their home and this effectively trapped people in their properties, unable to afford to finance another purchase or move into a care home with the sale of their property.

Due to the vast increase in property prices and the interest rates charged, some of these debts have risen by 500%. They were sold as equity release options to older borrowers who needed to top up their pensions and were encouraged to take out a shared appreciation loan without proper legal advice. A This is Money investigation revealed that older borrowers were rushed into hugely expensive mortgages. The bank then sold those debts on to investors and therefore said they were were unable to help borrowers.

Should I get a shared appreciation mortgage?

Shared appreciation mortgages can be a great financing option in specific circumstances.

Use an impartial mortgage broker

Explain your needs to an impartial mortgage broker as they have access to the whole of the market and will be able to recommend products to suit your needs.

Free Consultation* | 100% Impartial Advice | Access to Whole Market

Opt to pay monthly interest

If you opt for an 'interest free' shared appreciation agreement, you'll pay a much higher percentage to your lender at the end. Always opt for product where you pay monthly interest if you possibly can.

Use shared appreciation mortgages as short term financing only

The longer you wait to sell or refinance the property, the greater the likely increase in value and the greater the amount payable to the lender.

Get independent legal advice

You should make sure you fully understand the benefits and risks of the mortgage product and get professional advice on the terms of your shared appreciation agreement before you sign.

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Caragh Bailey, Digital Marketing
Written by:
Caragh is an excellent writer in her own right as well as an accomplished copy editor for both fiction and non-fiction books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey and mortgage related articles.
Andrew Boast of Sam Conveyancing
Reviewed by:
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.

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