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Moneybox Saturday, 31 August, 2002, 10:18 GMT 11:18 UK
Mortgage misery for BoS customers
House sold sign
The effects of a price boom were not spelled out

People who took out an award winning mortgage in the late 90s are finding it is proving to be a disaster.

Thousands of people owe huge amounts of money because they signed up to Bank of Scotland's innovative 'Shared Appreciation Mortgage' just before house prices started to rise sharply.

This mortgage was designed largely for older people who already owned their homes but wanted to raise extra money - usually to supplement pensions.

It was so innovative at the time, it was selected by the Design Council as one of its Best of British Millennium Products.

But now its reputation is severely tarnished.

How it worked

It was really an equity release plan, allowing people to borrow up to a quarter of the value of the home, interest free.

But customers had to agree in return that the Bank could take three quarters of any future increase in the value of the property.

That seemed fine back then as property prices were hardly moving. But in the five years since they are up a phenomenal 83%.

Many people have been contacting the BBC's Money Box programme about the huge repayments they must now make as a result.

Not transferable

John was 69 when he borrowed just over 21,000 on his house, then worth 85,000.

His home's value has increased by 50,000, so the bank would ask for 37,000 if he decides to move home and redeem the mortgage, which is not transferable to another property.

He estimates if house prices continue to rise as they are, Bank of Scotland will stand to make over 100,000 in 10 years time.

'Daylight robbery'

Another listener, Louise, only discovered the terms of this mortgage when she was left to sort out the financial affairs of her aunt and uncle after they had died.

They had borrowed 15,000 pounds in a Bank of Scotland Shared Appreciation Mortgage in 1997.

Even loan sharks would be embarrassed by this rate of return

Money Box listener Louise

When the property was sold, Bank of Scotland took close to half of it - 41,000 pounds out of the 90,000 price it fetched.

"This is complete daylight robbery" Louise told Money Box, "Even loan sharks would be embarrassed by this rate of return."

House sold sign
Surviving relatives, who knew nothing of the deal that had been signed, received a lower inheritance.

But Louise was most concerned that if her aunt moved into a care home she would have had to sell the property and there might not be enough to pay for all care after Bank of Scotland had taken its huge cut.

In other cases people have now cashed in investments or asked relatives for the money to help them bail out .

Profit rights

Bank of Scotland says in fact it is not profiting from these deals anymore, instead it is a private undisclosed investor to whom it sold the profit rights via a City firm.

It adds that because of this it is now impossible for BOS to make changes to the way the mortgage works or what people must pay.

Complaining about this mortgage does not work either.

Although the effects of a property price boom were not spelled out in the documents, people were expected to have worked that out for themselves.

So most people will be stuck with it unless relatives can step in and pay off the bank.

Of course if there were to be a property price crash people would not owe the bank so much.

But at present this looks like another classic example of the financial services industry profiting from being one step ahead.

The BBC's Chris A'Court
"Its reputation is severely tarnished"
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See also:

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