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.
Six to view by the sea
Grade 2-listed converted lighthouse, with three large bedrooms
Three-bed 19th-century converted boathouse on seafront, with large garden to rear
Hayling Island, Hampshire
Five-bed detached house on banks of Solent, with large rear garden and garage
Four-bed detached house with sea views, beach access, garage, front and rear gardens
Brighton, East Sussex
Four-bed apartment in grade 2-listed mansion block with sea view
Grade 2-listed four-bed thatched cottage, with large landscaped garden to rear
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
- 1 Michael Brown shooting: Amnesty International sends team within US for first time as National Guard deployed
- 2 James Foley 'beheaded': Isis video shows militant with British accent 'execute US journalist' – and warns Obama of more to come
- 3 Reading Festival 2014: Tesco branch replaces salad and potatoes for Jagermesiter and vodka
- 4 Here’s the damning letter Robin Williams wrote to his Mrs Doubtfire co-star's principal after they expelled her
- 5 Ferguson protests: 90-year-old Holocaust survivor Hedy Epstein ‘arrested’ by police during St Louis demonstrations
Isis threat: Cameron wants an alliance with Iran
Crisis? What crisis? A visiting US doctor gives the NHS a rave review
Scottish independence: English people overwhelmingly want Scotland to stay in the UK
Russell Brand calls for Israel boycott: Comedian urges big businesses that 'facilitate the oppression of people in Gaza' to pull funding
Ukip MEP calls for reintroduction of death penalty on fiftieth anniversary of last deaths
Michael Brown shooting: Chaos erupts on the streets of Ferguson after autopsy shows teenager was shot six times – twice in the head
iJobs Money & Business
£475 - £550 per day + competitive: Orgtel: Senior Technical Accountant-Insuran...
£200 - £290 per annum + competitive: Orgtel: Sales Performance Manager, Key Ba...
£25000 - £30000 per annum + bonus+benefits+package: Harrington Starr: Junior D...
£600 - £800 per day: Harrington Starr: Java/Calypso Developer Java, Calypso, ...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony