Will you live to regret the day you signed away your home?
Laura Howard says hard-pressed borrowers tempted by 'sale and rent back' schemes should think again
Sunday 11 November 2007
A housing market slowdown coupled with the rising cost of mortgages makes fertile ground for the growth of schemes packaged as a solution for homeowners in dire financial straits.
Among these is the "sale and rent back" agreement, where a property is purchased from a financially flailing homeowner and rented back out to them.
The immediate appeal of this arrangement is that the homeowner can remain living in the property, albeit as a tenant, sparing them the emotional turmoil of leaving their home. In addition, they can get their hands on urgently needed cash and sidestep the inevitable long-term damage to their credit record of having their home repossessed.
The market is ripe for such schemes, with high levels of personal debt and five interest rate rises between August 2006 and July this year, as well as fewer people looking to buy. According to the Council of Mortgage Lenders, the number of repossessions could soar from 30,000 this year to 45,000 in 2008.
Glenn Ackroyd is legal and policy director at the sale and rent back provider A-quick-sale.co.uk, which launched in 2003. He says: "With lenders tightening up on their criteria following the credit crunch, it is more difficult to remortgage and pay off unsecured debts – especially for subprime borrowers [with poor credit records]. And with a stagnant property market, as it is now, there is less equity to borrow against in the first place."
But those who opt for sale and rent back will be treading on potentially dangerous ground. First, while the industry is perfectly legal, it is unregulated – and, as the market grows, increasingly inhabited by companies less scrupulous than A-quick-sale.co.uk.
"This is a very fragmented industry," says Mr Ackroyd. "There are hundreds of one-man-band operations who buy a couple of houses every year on their own terms and do not have a reputation to protect."
Second, whoever they buy from, homeowners will get well under market value for the sale of their property. A-quick-sale.co.uk employs a "discount structure" of around 20 per cent but Mr Ackroyd warns that the discount will be bigger still with smaller firms. Anecdotal evidence has shown some homeowners receiving as little as half of the property's total value.
These kind of desperate financial measures are often taken so that people can stay in their "own home", but, actually, sale and rent back schemes offer no security of tenure. Once a tenant, the ex-homeowner is subject to a regular assured shorthold tenancy agreement, either for six or 12 months. After this time the landlord can throw them out on the street.
The Consumer Credit Counselling Service (CCCS) has seen a significant increase in the number of calls relating to sale and rent back – but usually after the property has been sold.
"Our councillors have reported cases of homeowners being treated very badly by sale and rent back schemes," says Frances Walker, spokeswoman for the CCCS. "It is often homeowners at their most vulnerable who are targeted – those going through a divorce, for example, who can no longer afford the mortgage but are not emotionally strong enough to move out of their home."
Incredibly, the situation can get worse still. The Citizens Advice Bureau (CAB) has dealt with cases where small companies in the sale and rent back market have themselves defaulted on the mortgage and the home is repossessed anyway.
Even if the rent is finding its way to the landlord's mortgage lender, the tenant may no longer be entitled to the same help as others living in rented accommodation. "Under government rules, you will not be able to claim housing benefit as a tenant if you or your partner has been the legal owner of the property in the last five years," says Rosalind Pearson at the CAB.
Hard-pressed homeowners, she adds, would be better off taking a mortgage payment holiday, extending the term of the loan, switching to an interest-only deal or taking in lodgers rather than going for sale and rent back.
Mr Ackroyd maintains that, in some cases, companies like his provide good value. "Many of our customers are with subprime lenders struggling with nine or 10 per cent interest rates anyway. So a £1,000 mortgage may turn into £550 a month [in rent]."
A-quick-sale.co.uk has just committed to a long-term tenancy guarantee by which tenants can live in their homes for at least five years. Due to the nature of assured shorthold tenancy agreements, this guarantee has to take the form of five 12-month contracts, says Mr Ackroyd. "If we fail to adhere to the contract, the customer gets £5,000 or 5 per cent of the current value of the property, whichever is the greater."
A-quick-sale.co.uk also gives customers the chance to buy back the property, though Ray Boulger, technical director at mortgage broker John Charcol says this is a "very unlikely" outcome. He adds that these guarantees do not necessarily provide peace of mind for homeowners. "The company could be taken over or your circumstances could change, which means any protection you signed up for no longer applies."
Mr Ackroyd wants the Financial Services Authority, the industry watchdog, to regulate the sector and is setting up a trade association. To date, five companies have joined. However, judging from the hundreds of adverts for sale and rent back in newspapers and online, the new trade body has a big task ahead of it.
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