According to the Financial Times, in the court documents the homeowners argue the percentage of equity taken by the Bank of Scotland, part of Lloyds Banking Group, was “grossly excessive”.
The action, led by law firm Teacher Stern, will be heard in the High Court and relates to mortgages agreed in the late 1990s.
Teacher Stern said that in the case of one claimant they have been left owing £1.6m to Bank of Scotland after taking out a £187,000 shared appreciation mortgage in 1998 against their £750,000 London home which is now worth £2.8m.
Shared appreciation mortgages are tied to a property’s value. Offered during a short period in the late 1990s by banks such as Bank of Scotland and Barclays before the advent of equity release, the mortgages were billed as a way to fund retirement.
Homeowners were offered the opportunity to release up to 25 per cent of the value of their home often interest free. However, on the sale of the property the homeowner would have to repay the loan in full and 75 per cent of the increase of the value of their home since taking out the deal.
The rapid rise in house prices since the loans were taken out has meant that some shared appreciation mortgage holders have seen their debt rise 500 per cent on the amount they originally borrowed.
The homeowners allege that they were “for the most part financially unsophisticated”, the bank saw “all but guaranteed high returns” and the mortgages had “trapped borrowers in their homes until their deaths”.
The FT reports that value of the claims could be as much as £50m. Teacher Stern’s case alleges that the mortgages were “fundamentally unsuitable” for consumers and “inherently unfair” under the terms of the Consumer Credit Act 1974.
Teacher Stern also led an action against Barclays on behalf of 37 borrowers who took out shared appreciation mortgages around the same time. The law firm negotiated an out-of-court settlement with Barclays on behalf of the homeowners in June.
Bank of Scotland is defending the claim and denies all the allegations laid against it.
It says all borrowers had independent legal advice and its relationship with the homeowners was fair, according to reports of the court documents.
Lloyds Banking Group has declined to comment on the ongoing case but says it continues to offer support options to all mortgage borrowers facing financial difficulty.
The case is due before the High Court in October.