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With a shared appreciation mortgage, you can give away a percentage of your home appreciation in return for potentially low-interest rates.
We’ll help you discover:
- An introduction to shared appreciation mortgages.
- Whether they’re beneficial or should be avoided.
- The variation of shared appreciation mortgages on the market.
As experts in the financial sector, we’ve combed the market and spent hours researching and analyzing shared appreciation mortgages.
Could they be an ideal solution for your estate? Find out now!
What You MUST Know About Shared Appreciation Mortgages
In a nutshell, a shared appreciation mortgage (SAM) is when you, the property purchaser, share a percentage of your home’s appreciation in exchange for lower than average interest rates.
Some shared appreciation mortgages come with a phase-out clause after a certain number of years, so you might want to search for a plan with this feature.
Shared Appreciation Mortgages vs Regular Mortgages
The difference between a shared appreciation mortgage and a regular mortgage is apparent at the time of your property’s sale.
With a standard mortgage, you’ll pay your lender the value of your loan, plus interest, over several years. The income from the sale of your home will then pay off the remaining balance on your mortgage.
Shared Appreciation Mortgages
With a SAM, you’ll agree to hand over a portion of the home’s appreciated value to your mortgage lender when your home is sold. This is in addition to paying off your loan. The appreciated value that you pay is known as the contingent interest because you’re essentially paying interest in the form of appreciated property value.
The contingent interest amount is agreed upon upfront, and it’ll be due to your mortgage lender when you sell your property. In return, the bank will usually offer a lower interest rate on a SAM.
2 Variations of Shared Appreciation Mortgages
There are contingents built into shared appreciation mortgages, so you need to be aware of these to make an informed decision.
These could include what’s referred to as a phased-out clause. This can reduce, or entirely phase out over time, the percentage that’s paid to your mortgage provider. The clause is a means to discourage you from selling the property and instead pay back your mortgage. In some cases, you’ll end up owing nothing at the time of the sale.
Another variation of a phased-out clause is that you as the homeowner will only pay a percentage of your home’s appreciation value if a sale takes place within the first few years of purchase. This will typically be 25% of the value if the sale occurs within the first 5 years.
Pro Tip: An ideal situation is for you to keep your property for 5 years and if the value increases, then sell your home only after the 5 years to keep the full appreciated amount.
There are some risks involved. If you refrain from selling your home and instead hold the property until the mortgage ends, you could be in a position where you have to pay the bank their portion of the appreciated value.
The Ins and Outs of How They Work
If you’re looking to use the property as an investment, you might want to consider a SAM. Rising housing prices will serve you to use a SAM when buying, renovating, and then selling. However, this type of loan could have a time limit on balance repayment. If your property isn’t sold by the deadline, expect to refinance the leftover balance at the prevailing market rate.
If property prices plummet, there’s no need to fear. Your bank might offer you a loan modification that reduces your mortgage debt in line with the lower market value. In return, the bank would expect your loan to be modified to a shared appreciation mortgage.
A shared appreciation mortgage could have an impact on your tax benefits. It’s vital to speak to your financial adviser before considering this type of mortgage.
What’s the Catch?
When you pass away or your property is sold, your lender is paid the total amount borrowed plus a share of the appreciated value in the property since the loan was signed. This equals 3x the Loan to Value Ratio percentage (or 1x if they paid interest).
Given the substantial rise in the property market since the late 90s, this has had disastrous consequences for a significant number of policyholders. Many have been left with insufficient equity to move or pay for long-term care, forcing you to remain in your home until you pass away.
In addition, the interest rates payable on a SAM can be exorbitant, so seek professional financial advice to avoid this.
While a SAM can be risky, you could find a plan that could be highly profitable with the proper assistance and advice. This is particularly if you’re looking to buy, renovate and then sell.
While shared appreciation mortgages can come with low-interest rates, watch out, as this isn’t always the case.
However, we strongly recommend that you don’t opt for a shared appreciation mortgage unless you’ve done in-depth research and it’s been advised by your specialist financial adviser.