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Lloyds Banking Group is being sued in the High Court by 150 homeowners who allege that they have lost out on thousands of pounds after being sold mortgages tied to house price appreciation.
The case has been brought against Bank of Scotland, which is now part of Lloyds, and centres on so-called shared appreciation mortgages, which permitted borrowers to take out a loan against their house provided that the bank received a percentage of the equity growth when the property was sold.
Since the mortgages were agreed in the late 1990s, however, house prices have more than quadrupled leaving some homeowners owing the bank hundreds of thousands of pounds more than their original loan. According to Land Registry data, the average price of a UK property has risen from £56,630 in April 1996 to £265,668 in June 2021.
Teacher Stern, the law firm acting for the homeowners, said the value of the claims could be as much £50m. Its case alleges that the mortgages were “fundamentally unsuitable” for consumers and “inherently unfair” under the terms of the 1974 Consumer Credit Act. Bank of Scotland, which is defending the claim, denies the allegations in their entirety.
The case is due before the High Court in October with no date yet fixed for trial. Barclays, which was also facing legal action over similar products, settled with 37 borrowers in June.
Shared appreciation mortgages were a precursor of equity-release type products and were sold to older consumers to help fund their retirement.
Some mortgage loans allowed homeowners to borrow up 25 per cent of the value of their homes — provided they repaid up to 75 per cent of any appreciation of the property’s value. Teacher Stern said that in one case a claimant took out a £187,000 loan against their £750,000 London home in 1998 but now owes the bank £1.6m as the property value has increased to £2.8m.
The law firm estimates that an estimated 12,000 to 15,000 shared appreciation mortgages were sold by Barclays and Bank of Scotland between 1996 and 1998.
The homeowners allege that they were “for the most part financially unsophisticated” and claim that the bank saw “all but guaranteed high returns”.
In court documents, the claimants argue that the percentage of equity taken by the bank was “grossly excessive” as it was not capped and say the products have “trapped borrowers in their homes until their deaths” as it is now difficult for them to sell up as they have little equity in their homes. They want the High Court to strike out the agreements or alter the loan terms to a fairer rate.
In its defence document, Bank of Scotland says the relationship between it and the claimants was fair and all borrowers had independent legal advice. It says their complaints are “based on hindsight” because the bank “took risks” of possible house price depreciation.
The bank alleges that the homeowners “obtained substantial benefits” from taking out the loans which were “not difficult to understand” and says the bank documentation “fairly and clearly explained the terms”. Lloyds declined to comment.