Interest rates are set to rise sooner rather than later and when they do the skids could be put under tens of thousand of stretched mortgage borrowers. "Low interest rates have helped many struggling debtors stay in their homes but I fear with three interest rate rises predicted by economists before the end of the year, we will see a fresh surge in arrears and repossessions," says Una Farrell, from national debt charity Consumer Credit Counselling Service (CCCS).
And with arrears and repossessions the controversial sale-and-rent-back (SRB) firms rear their heads. Their schemes, which enable desperate homeowners to sell their homes quickly, then rent the property back, have come under heavy criticism in the past. Previous investigations found that some firms would offer struggling homeowners as little as half the market value of their property, lock them into expensive rental arrangements and force some tenants out of their homes after less than a year.
Steps have been taken to bring some order to the SRB market, with operators now coming under Financial Services Authority (FSA) regulation. The FSA demanded a 14-day cooling-off period and a ban on exploitative advertising, cold-calling and high-pressure selling. Affordability checks must also take place to ensure that the SRB deal is right for the consumer, and those entering an SRB agreement must have a minimum five-year tenancy.
"Previously tenants could have been chucked out quite quickly. We saw a lot of vulnerable homeowners being evicted after only half a year so we needed tighter controls to make sure people were better protected," says Toby Parker, an FSA spokesman.
Yet SRB schemes still pose a threat to vulnerable borrowers. News that two SRB companies were last week reported to the FSA for acting without regulation after a mystery-shopping investigation by consumer organisation Which? only serves to highlight the continuing risk. Other companies were found to be offering inadequate advice, failing to explore different options with the customer and one adviser even gave a quote that would have left the client without enough money to clear their credit-card debt.
Despite the limited advantages of SRB, for some homeowners the attraction of selling up at a discount to settle an existing mortgage or other personal debts, without having to leave their home, is very tempting. In addition, it can be done quickly and discreetly, with some companies offering tenants the opportunity to buy the house back at a later date.
There are considerable drawbacks, however, most notably that by targeting those who need to sell quickly, SRB firms are in a strong position to get the lowest possible price, with most offering between 60 and 70 per cent of the market value. Even worse, tenants can still face eviction after the five-year minimum if they fall behind with the rent payments. Equally, if the SRB company wants to sell the property after the minimum five-year tenancy, or fails to keep up with its own mortgage payments, the property could still be repossessed, leaving tenants without a home and potentially out of pocket.
Only last June, Manchester-based firm UK Housing Alliance (North West) went into administration with outstanding debts to its secured lender. Sellers were typically given 70 per cent of the value of the sale, with the promise of the remaining 30 per cent after paying top market rent for 10 years, but when the company went bust, tenants were told they have lost the guarantee for that payback.
While an SRB arrangement is undoubtedly quicker than selling on the open market, the numerous potential pitfalls should persuade anxious homeowners to explore alternatives and the first step is always to speak to the lender. Repossessing a home is complicated and expensive so lenders should be keen to help borrowers resolve their problems.
"If you are really struggling with the mortgage, perhaps you could rent out the property and rent a cheaper property for you to live in? Then, when the market picks up, you could sell the property. If you decide to do this, you must seek the lender's permission first; otherwise you are in breach of your mortgage contract," says Melanie Bien from independent mortgage broker Private Finance.
Other options could include remortgaging onto a cheaper deal by extending the term of the mortgage, switching to an interest-only mortgage, or taking a payment holiday. Free debt help is also available from charities such as CCCS and local Citizens Advice Bureaux.
With SRB arrangements there is no guarantee that becoming a tenant, rather than a homeowner will make meeting the rental payments any easier than covering the mortgage payments. Those with severe financial difficulties may have to accept that they cannot afford to live in their home and that selling up on the open market, then downsizing or renting is still a cheaper option. For those reaching retirement age, it may also be worthwhile considering purchasing equity release. This can be an inflexible and expensive option, but it does allow homeowners to release cash tied up in their property while remaining at home until death.
Homeowners on benefits such as Jobseeker's Allowance and Pension Credit may be able to claim Support for Mortgage Interest (SMI) to help cover the interest repayments in the short-term. There are also various government-backed mortgage rescue schemes designed to help homeowners stay in their homes. In England, under the Shared Equity Scheme, a housing association offers a loan used to lower mortgage repayments, while the Mortgage to Rent Scheme is a form of SRB, with the housing association buying the property but allowing the homeowner to remain as a tenant. However, both schemes have downsides, including joining fees, limited availability and stringent eligibility requirements.
Melanie Bien, Private Finance
"Sale and rent-back schemes could become more popular as over-stretched homeowners become increasingly desperate. Homeowners might be attracted by staying in their home and renting it back from the company, but the reality is that they are selling their home for a fraction of the market value."