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What is a shared appreciation mortgage (SAM)?

By Prachi Sinha

Reviewed by Vanessa Kintu

Fact checked by Paul Sorene

Shared Appreciation Mortgage

Buying your own house is a dream for many people. Most can afford houses only by way of borrowing through mortgages. A mortgage essentially allows the buyer to purchase the property without having to pay all the money up front. Marketed as a proposition for the asset rich but cash poor, a shared appreciation mortgage works in a similar way to a traditional mortgage but with certain key differences.

A shared appreciation mortgage is structured as a form of equity release, wherein the lender allows for a capital borrowing in return for a future share in the appreciated value of the property. How a shared appreciation mortgage (SAM) is calculated differs from case to case.

How does a shared appreciation mortgage work?

A SAM offers an advantage to the borrowing and lending parties. For the borrower, if they are struggling to meet the high equated monthly instalments (EMIs) of a traditional mortgage, a SAM can make their payments more affordable. Interest charged on a SAM is relatively lower than prevailing market rates and allows borrowers to purchase higher-priced homes than they might have been able to afford under a regular mortgage.

While the lending party takes a hit by earning less interest from the borrower, they get a share in the home’s value when it’s sold. However, there is the risk that the property value may not appreciate. In such cases, where there is no increase in the property’s value at the time of its sale, the borrower would only have to pay back their initial loan from the lender.

Shared appreciation mortgage example

Let’s say you enter into a shared appreciation mortgage with your bank to purchase a house valued at $500,000. A contingent interest clause of 20% could be added to the terms and conditions of your contract. This would mean that should you decide to sell the house, say, 10 years later, and its value turns out to be $800,000, you will be obligated to pay the bank 20% ($60,000) of the total appreciated value of $300,000.

Different variations of shared appreciation mortgages can exist with respect to what needs to be paid out to the lending institution. Some SAM contracts have a phase-out clause, through which the obligation on sharing the appreciated value with the lender is eliminated over time. On other SAM contracts appreciation may only need to be shared if the property is sold within a certain time frame.

Difference between traditional mortgage and SAM

In a traditional mortgage, the lender charges standard interest on the amount borrowed for a defined number of years. The borrower pays EMIs – the frequency of this payment could differ depending on the contract agreement – through the life of the mortgage. When the borrower decides to sell the mortgaged property, a portion of the sales proceeds could be utilised to pay off any leftover debt obligations to the lender.

In a SAM, the borrower would have to pay a designated portion of the home’s appreciated value to the lender in addition to paying off the mortgage. The borrower is expected to share the appreciated asset value in return of being charged a lower interest rate on his initial borrowing amount.

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