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They were billed as the answer to cash-strapped pensioners' prayers: zero-interest loans where borrower and bank would "share" in any appreciation in house prices.
But a dozen years after they were heavily marketed, "shared appreciation mortgages" (Sams) have left thousands of elderly people stuck in their homes. If they want to downsize, adapt their property, need sheltered accommodation or require a care facility, they have to surrender the great bulk of their home's value to Barclays or Bank of Scotland (part of HBOS) - the two banks that sold Sams - which means they cannot move anywhere more suitable.
Enter the "Rottweiler". Lawyer Hilary Messer at Reading-based solicitors RWP acquired her nickname for her tenacity in getting compensation for victims of the Paddington rail crash, for fearlessly (and successfully) taking on Royal Bank of Scotland and UCB Home Loans, and in winning a landmark case against Eagle Star Insurance that had a multimillion-pound potential payout. She has now sent HBOS and Barclays "a legal 'letter before action' as part of the multimillion-pound claim we're bringing on behalf of the 8,000 UK homeowners still living, or their legal representatives (about half the original holders have died), who hold Sams".
Sams were sold as mortgage loans, by which the bank would take a percentage of any gain in the value of the home when the borrower died or moved instead of charging interest. When the schemes started in the late 90s, house price inflation was low.
Bank of Scotland used a 4.5% annual growth figure for its illustrations, while Barclays went for 5%. Both were based on the Halifax house price index at the time. But house prices exploded over the following decade, giving huge gains to the banks - or wherever the securitised loans ended up. As a result, Sam borrowers have been thrown out of the housing market. They cannot afford to downsize or move because there is little left when they sell.
Here are just some of those affected:
• Trowbridge, Wiltshire, homeowner John Beech borrowed £38,500 from Bank of Scotland in 1998 on a £153,000 property. He wants to move, but will have to repay £257,500 from a likely £440,000 sale proceeds.
• Tiverton, Devon homeowner Ivy Winstone, 85, will have to pay £115,000 on the sale of her property, after borrowing just £17,500 11 years ago from Bank of Scotland. She cannot move: the £80,000 left from selling her bungalow will buy nothing in her area.
• Maureen Putnam of Dorchester, Dorset, will have to pay Barclays £127,500 for a £30,000 loan. This would leave her £115,000 from a sale.
• A Yorkshire homeowner said last week he would have to pay £236,000 on the sale of his property, for borrowing just £48,500. He wanted to maximise assets to pass on to his children. He died unexpectedly earlier this week.
"I have hundreds of similar cases," says Messer. "This works out at a huge and excessive interest rate, so I shall, in part, rely on a recent change in the law to sue the two banks. I intend a group action against HBOS and Barclays, which could cost them hundreds of millions of pounds."
In the past, legal actions using the Consumer Credit Act 1974 relating to "extortionate credit bargains" were rarely, if ever, successful. But, Messer contends, new provisions have retrospectively lowered the bar for consumers to mount a winning case.
"If the court determines that the relationship between the bank creditor and the borrower is 'unfair' to the consumer, it has wide powers to vary the terms of the loan agreement. Leading counsel has advised there are strong grounds for arguing the relationship between the bank and the Sam customer was 'unfair' for the purposes of these new provisions. Counsel also says certain of the terms of the loan agreements were themselves 'unfair' and brochures were 'misleading'."
Messer says brochures failed to show the potential effect of house price inflation. "The relationship is unfair. It is stacked in favour of the banks because they had expert knowledge."
Joining the action is not cheap. The lawyers want £5,000 per borrower, but say it could be worth it if this results in a reduction of the interest rate or a cap on repayment.
Barclays says: "We have only just received correspondence from a firm of solicitors about this issue. While that correspondence is being considered, it would not be appropriate to comment further on its contents."
It adds: "We have great sympathy for Sam customers in difficulties. We set up an interest-free loan hardship scheme in 2007 to help those moving or adapting a home. We are comfortable we did everything we could in 1998 to ensure customers understood the product, but none of us could have predicted the 9.9% annual increase in house prices since then."
HBOS says it did not have a formal hardship scheme, but has helped on a case-by-case basis. "We believe the terms were clear when the loans were offered. As this is now subject to potential litigation, it is not appropriate to comment further."
Fewer than 100 Barclays customers have successfully claimed on its hardship scheme, according to its last report.
t.levene@guardian.co.uk
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