Beware of Greeks...

Milarky

(From Today's Independent)

Q. I obtained an interest-free loan from the Bank of Scotland in 1997 for the value of 25 per cent of my home, in return for which, on sale, the bank gets the loan repaid plus 75 per cent of the increased value of the home. On current values, I would get £142,500 on sale and the bank would get £207,500 - leaving the bank with a 10-fold return on the loan in nine years. I feel Bank of Scotland should share part of this gain with me, but it is refusing to do this. BW, Crowborough

BOS has received three times its effective 'stake' (because 3/4ths of the increase is attaching to 1/4th of the original value). But on top of that they have fully benefitted from the rise in the value of the property.

House cost £113,000 in 1997
Owner borrowed £28,250 (so held £84,750 in equity)
Paid no interest on his £28,250 loan - nor payments we assume

House sells for £352,000
Bank collects £28,250 (loan repaid)
Bank collects £179,250 (appreciation of property)

Home owner (ex-he sold it actually) now has £142,500 - a gain of £57750

He's feeling chilly and stupid, but the bank was only risking a small loan on a leveraged increase (and interest would have been about 6% over, so I reckon the homeowner has paid about £200,000 for something that should have cost around £50,000)

movieman

If they were dumb enough to sign up for that, I don't see what the problem is; it would seem that the terms were very clear, and the bank didn't try to hide anything. I think it's a safe bet that he wouldn't be complaining if house prices had dropped and he effectively got a free loan for ten years.

And as for the 'owner paying 200,000 pounds', the money has almost entirely come from house price inflation, so he's paid none of that himself.