A shared appreciation mortgage (SAM) is an option to consider when you are investing in a property and want to reduce the interest rate by offering to share some of the property’s appreciation with your lender. There are obvious advantages to this in terms of the potential repayments, but there are considerations that must be taken into account.
Shared appreciation mortgages explained
SAMs, as featured in the Financial Conduct Authority Handbook, allow lenders to agree to a lower interest rate in return for the compensation that comes with an appreciation in a property’s value.
The differences between SAMs and regular mortgages
With a regular repayment mortgage, you will pay your lender the principal amount owed plus interest. The proceeds of any sale can be used to pay off any outstanding balance on the mortgage and any gains can be used or kept by the borrower. In contrast, a SAM means you have to pay off any outstanding mortgage balance and give a percentage of any gains to your lender.
Any appreciated sum paid to your bank is known as the contingent interest. The rate of this is agreed upon when you take out a SAM.
Variations of SAMs
There are a variety of contingents that can be built into SAMs; for example, they can include a phased-out clause, which means the contingent interest element can be wiped out completely or reduced over time.
When are SAMs useful?
SAMs are often used by investors and those who have a business interest in renovating and selling on properties. They can be used alongside other legal documents, such as a deed of trust arranged by a law firm such as https://www.parachutelaw.co.uk/deed-of-trust.
A SAM may also be useful to you if a mortgage is above the value of your property or if the housing market has fallen after a property purchase. Your bank could offer you the chance to reduce your debt to reflect a lower market value in return for a return on any appreciation in the future.
Tax implications
There can be tax implications if you decide on a SAM, meaning that lenders and borrowers have different rules to adhere to when it comes to appreciation gains. This is why it is always essential to seek professional advice before making a large financial decision such as taking out a SAM.
