Shared Appreciation Mortgage: Benefits and Risks Explained

A shared appreciation mortgage is a unique financial product that can be both beneficial and risky. It's a type of mortgage where the lender and borrower agree to split the appreciation of the property's value equally.

The key benefit of a shared appreciation mortgage is that it allows the borrower to access more funds than they would with a traditional mortgage, since the lender is also investing in the property's appreciation. This can be particularly helpful for first-time homebuyers or those with limited down payments.

However, the borrower typically gives up a portion of the property's appreciation to the lender, which can be a significant drawback. For example, if the property value increases by $100,000, the borrower might only receive $50,000 of that increase, while the lender gets the other $50,000.

A shared appreciation mortgage, or SAM, is a type of mortgage where the borrower shares a percentage of the home's appreciation with the lender.

The borrower agrees to share a percentage of the gain on the house when it's sold, which is known as a contingent interest. This percentage varies depending on the mortgage and the parties involved.

A lender may require anywhere from 30% to 50% of the appreciation, which means if the home's value increases, the borrower will pay the lender a portion of that increase.

For example, if a borrower sold a home for $400,000 and had a contingent interest of 50%, they would pay the lender $50,000 – or 50% of the increased value.

A shared appreciation mortgage can be structured in various ways, including:

In a shared appreciation mortgage, you'll typically agree to give a portion of the home's appreciated value to the lender when you sell the house, in addition to paying off the mortgage. This is called the contingent interest.

The lender will usually offer a lower interest rate on a shared appreciation mortgage, which can decrease the mortgage payment. For example, if you enter into a shared-appreciation mortgage with a 25% contingent clause, you'll pay the lender 25% of the home's appreciated value.

The share of appreciation payable upon sale of the home can be based on the share of the original purchase price that was subsidized. For instance, if a family received a $50,000 subsidy to buy a $250,000 home, they would be required to give the community 20% of any home price appreciation at the time of sale.

The obligation to share the home's appreciation with the lender can remain in place until you sell the home, or it may expire after a certain time frame or be phased out over the life of the loan. A phase-out clause works by reducing (or eliminating) the amount of interest owed to the lender over time, as the borrower does not sell the home and makes timely mortgage payments.

Shared appreciation mortgages (SAMs) can have various contingents built into them, such as phased-out clauses that encourage the owner to not sell the property and pay back the mortgage loan. A typical phased-out term stipulates that 25% of the value appreciation be paid to the lender if the borrower sells within five years.

Some SAMs phase out entirely or reduce the percentage paid to the lender over time, while others stipulate that the borrower pays a percentage of house price appreciation only if the home is sold within the first few years. If you don't sell the home and hold it until the mortgage ends, you might still have to pay the bank their portion of the appreciated value – if there's no phase-out clause.

If you're having trouble finding a SAM, consider alternatives like improving your credit score, applying for down payment assistance, comparing rates and loan offers from at least three lenders, or paying discount points.

Variations of Shared Appreciation Mortgages can have various contingents built into them.

A phased-out clause is a common variation, which could phase out entirely or reduce the percentage paid to the lender over time. This encourages the owner to not sell the property and to pay back the mortgage loan.

Some SAMs stipulate that the borrower pays a percentage of house price appreciation only if the home is sold within the first few years. A typical phased-out term would stipulate that 25% of the value appreciation be paid to the lender if the borrower sells within five years.

If a borrower doesn't sell the home and holds the property until the mortgage ends, they might still have to pay the bank their portion of the appreciated value—if there's no phase-out clause.

Banks make money on the interest charged on a mortgage loan, and if a buyer sells the house, the bank loses any future interest payments. A SAM helps offset some of the loss of interest on the loan if the property is sold.

If you're considering a shared appreciation mortgage, you should know that there are better ways to get a lower interest rate.

Improving your credit score is a great place to start. By doing so, you can qualify for more favorable loan terms and potentially save thousands of dollars in interest over the life of the loan.

Applying for down payment assistance can also give you more money to put down on a home, which can help you avoid private mortgage insurance and lower your monthly payments.

Comparing rates and loan offers from at least three lenders is another smart move. This can help you find the best deal and avoid getting locked into a loan with unfavorable terms.

Paying discount points can also be a good option, but it's essential to weigh the costs and benefits before making a decision.

Here are some alternatives to shared appreciation mortgages to consider:

If you're not sure what to do, it's a good idea to explore your options and consider what's best for your financial situation.

In commercial mortgages, a shared appreciation mortgage can be a complex arrangement. The lender and borrower agree to a lower interest rate, but the borrower must pay the lender a contingent interest of 20% of the appreciated property value.

For example, if a property is purchased for $500,000 and the borrower takes out a mortgage of $400,000 at 5% interest, the monthly payment is reduced from $2,398 to $2,147. However, if the property is later sold for $700,000, the borrower must pay the lender $40,000, which is 20% of the profit.

A shared appreciation mortgage differs from an equity-sharing agreement in that the principal of the loan is an unconditional obligation, meaning the borrower would still owe the outstanding principal if the property's value decreases. The lender takes an additional risk related to the property's value, which can be beneficial in a rising housing market.

The IRS Revenue Ruling 83-51 specifies conditions under which the contingent interest in a shared appreciation mortgage may be considered tax-deductible mortgage interest. To qualify, the mortgage must stipulate an unconditional obligation of payment of principal.

Shared appreciation mortgages (SAMs) are sometimes used with real estate investors and house flippers, particularly in a rising real estate market. This type of home loan can have a time limit on repayment of the balance, and properties not sold by the deadline may require refinancing of the remaining balance at the prevailing market rate.

In the case of an underwater mortgage, where the housing market declined following the home purchase, a bank might offer a loan modification to reduce the mortgage debt to match the lower market value of the home. This can involve modifying the loan to a SAM.

The benefits of a SAM for a prospective borrower include a lowered interest rate, which can decrease the mortgage payment. A decreased mortgage payment can greatly help a family that wants to free up cash for other financial needs.

However, the potential downside to a SAM borrower is the decrease in the gains that comes from sharing the appreciation with the lender. The overall value of that appreciation can be difficult to estimate when agreeing to the SAM due to the unpredictable nature of real estate markets.

Here are some examples of SAMs:

These examples illustrate how SAMs can be used in different scenarios, but it's essential to note that the terms and conditions of each SAM may vary.

A shared appreciation mortgage, or SAM, can be a valuable option for homebuyers looking to free up cash for other financial needs. The primary benefit of a SAM is the lowered interest rate, which can decrease the mortgage payment.

This can greatly help a family that wants to free up cash for other financial needs, such as repaying debts, building retirement savings or paying education expenses. The lowered interest rate can also lower carry costs for house flippers.

In a SAM, the purchaser of a home shares a percentage of the appreciation in the home's value with the lender. This means that the borrower will not receive the full benefit of the home's appreciation.

A shared appreciation mortgage can have a phased-out clause after a set number of years. This means that the lender's share of the appreciation will decrease over time.

The potential downside to a SAM borrower is the decrease in the gains that comes from sharing the appreciation with the lender. The overall value of that appreciation can be difficult to estimate when agreeing to the SAM because of the unpredictable nature of real estate markets.

Here are some key takeaways to consider when evaluating a SAM:

In the 1990s, mortgages were not fully regulated, with banks operating under the Banking Code and mortgage lenders under the Mortgage Lenders Code.

The Financial Ombudsman Service had legal powers to resolve customer complaints, but it couldn't investigate Shared Appreciation Mortgages because the companies administering these mortgages weren't signatories to the Banking Code.

Barclays Bank's booklet claimed they adhered to the Mortgage Code, but this turned out to be misleading, as the company had set up separate companies to issue the mortgages.

The Mortgage Code was introduced in 1997 and remained in force until 2004, when it was replaced by the Financial Services Authority's Mortgage Conduct of Business Sourcebook (MCOB).

Prior to 1997, mortgages were not fully regulated, with banks operating under the Banking Code and mortgage lenders under the Mortgage Lenders Code.

These codes were voluntary, and while banks had to sign up to the Financial Ombudsman Service, mortgage lenders operating separately from their parent companies were not subject to the same regulations.

The Mortgage Code came into effect on 1 July 1997 for lenders and 30 April 1998 for mortgage intermediaries, setting out ten key commitments to help customers understand the financial implications of a mortgage.

The Financial Services Authority (FSA) didn't start regulating mortgage business until 31 October 2004, when the Mortgage Conduct of Business Sourcebook (MCOB) came into force, replacing the Mortgage Code.

The FSA was eventually replaced by the Financial Conduct Authority (FCA) on 1 April 2013, marking another significant shift in mortgage regulation.

In 2003, a group of 500 homeowners created the Shared Appreciation Mortgage Victims Action Group (SAMVIC) to coordinate legal action against banks.

The Financial Ombudsman Service was ineffective, prompting homeowners to seek help elsewhere.

Homeowners who felt deceived by lenders into taking on exorbitant debts joined SAMVIC.

Trials and tribulations are a normal part of any complex project, and the implementation team for the new system was no exception. They were alerted to a major issue with Unisys, one of the bank's IT systems, which could only process loans of up to 50 years.

The problem was that the new system, the SAM, was open-ended, meaning it could process loans until the sale of the property or the death of the owner. This discrepancy needed to be addressed.

The team also discovered that Unisys couldn't handle an interest rate of 0%, which added another layer of complexity to the project. This issue had to be resolved before the system could be implemented.

To avoid overloading the system, the processing capacity was upgraded, with a separate system for mortgages to avoid affecting the other systems. This upgrade helped to mitigate the risk of overnight processing overrunning, especially at the end of the month.