As repossessions rise, so does the risk of a return to sale-and-rent-back scams

Many families will face the agonising choice of losing their homes or becoming tenants, but a quick-fix option could prove very costly

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.

Expert View

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."

sportSo, how closely were you paying attention during 2014?
Arts and Entertainment
Dennis speaks to his French teacher
tvThe Boy in the Dress, TV review
One father who couldn't get One Direction tickets for his daughters phoned in a fake bomb threat and served eight months in a federal prison
people... (and one very unlucky giraffe)
Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
Arts and Entertainment
The Plaza Theatre in Atlanta, Georgia was one of the 300 US cinemas screening
filmTim Walker settles down to watch the controversial gross-out satire
Arts and Entertainment
Amy Adams and Christoph Waltz in Tim Burton's Big Eyes
film reviewThis is Tim Burton’s most intimate and subtle film for a decade
Life and Style
Mark's crab tarts are just the right size
food + drinkMark Hix cooks up some snacks that pack a punch
Arts and Entertainment
Jack O'Connell stars as Louis Zamperini in Angelina Jolie's Unbroken
film review... even if Jack O'Connell is excellent
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Selby Jennings: Quantitative Research | Equity | New York

    Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

    Selby Jennings: SVP Model Validation

    Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    The Jenrick Group: Night Shift Operations Manager

    £43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

    Day In a Page

    Aren’t you glad you didn’t say that? The worst wince-and-look-away quotes of the year

    Aren’t you glad you didn’t say that?

    The worst wince-and-look-away quotes of the year
    Hollande's vanity project is on a high-speed track to the middle of nowhere

    Vanity project on a high-speed track to nowhere

    France’s TGV network has become mired in controversy
    Sports Quiz of the Year

    Sports Quiz of the Year

    So, how closely were you paying attention during 2014?
    Alexander Armstrong on insulting Mary Berry, his love of 'Bargain Hunt', and life as a llama farmer

    Alexander Armstrong on insulting Mary Berry and his love of 'Bargain Hunt'

    From Armstrong and Miller to Pointless
    Sanchez helps Gunners hold on after Giroud's moment of madness

    Sanchez helps Gunners hold on

    Olivier Giroud's moment of madness nearly costs them
    A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

    Christmas without hope

    Gaza fears grow that conflict with Israel will soon reignite
    After 150 years, you can finally visit the grisliest museum in the country

    The 'Black Museum'

    After 150 years, you can finally visit Britain's grisliest museum
    No ho-ho-hos with Nick Frost's badass Santa

    No ho-ho-hos with Nick Frost's badass Santa

    Doctor Who Christmas Special TV review
    Chilly Christmas: Swimmers take festive dip for charity

    Chilly Christmas

    Swimmers dive into freezing British waters for charity
    Veterans' hostel 'overwhelmed by kindness' for festive dinner

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect