The positive equity trap

You hear a lot these days about people who've fallen into "negative equity" in their homes. The value of their home has fallen below the outstanding amount of the mortgage. A lot of these people are finding it hard to refinance when their mortgage falls due, even if the loan is entirely current.

"Which" magazine, never slow to jump on an anti-bank bandwagon, is now trying to drum up support for a group who claim to have the opposite problem. Back in the nid-1990s, a couple of banks offered a "shared appreciation mortgage" or SAM. You got the loan free, or at a very low fixed rate, but in return the lender took a proportion of the increase in the value of your house -- as much as 75% in some cases -- when time came for you to sell.

The April issue of Which contains what it presumably imagines to be a sob story from one "victim" of this outrageous free money scam. A gent who is now in his 80s borrowed £44,000 via a SAM in 1997. This was about a quarter of the value of his home at the time. He now wants to sell, but because the house is worth £450,000, he would have to repay £250,000 to the bank. He'd be left with "only" £190,000 or so, and the home he now wants to buy would cost him £230,000.

It's hard to pick your way through the logic of this, at least the logic as the victim sees it. Let's suppose the value of the house had not risen at all from 1997 to today. Our "victim" would have to pay back no more than the amount he originally borrowed, which would presumably make him happy, but he still might not have enough cash to buy the new home to which he now aspires. If the house were to go up by a further £150,000 or so, he might have enough for the new place, but something tells me he wouldn't be happy about paying over £350,000 to the bank to retire the existing loan.

Apparently there are 8000 people with SAMs outstanding. I don't know if all their stories are directly comparable to the one quoted by Which, but I'd bet they have something in common. They're all prople who saw a chance to get their hands on some free money, and now they're mad as hell that they've lost a big chunk of the benefit of rising house prices. Somehow I can't feel as sorry for them as I can for the negative equity crowd.