Is this a last ditch too far in avoiding repossession?

Julian Knight looks at the schemes that turn people into tenants in their own home

Like a recurring nightmare, repossession is stalking the streets of Britain once again. Lenders are warning of a 50 per cent rise in the number of people losing their homes. Meanwhile, the City regulator, the Financial Services Authority (FSA), says those same lenders are being too quick to foreclose when homeowners get behind with their repayments. A 1990s-style horror show seems to be playing itself out again.

Unable to borrow more cash or sell on the open market as house prices dive, homeowners facing arrears are taking drastic steps to keep a roof over their head.

Among these measures is sale and rent back, where a property is sold to a landlord – invariably below the market rate – and the vendor gets to remain in their home with a 12-month rolling contract. In effect, the homeowner has morphed into a tenant but has enough cash to repay the mortgage debt with perhaps a little left over.

"Sale and rent back fulfils a real need," says Lynsey Sweales at buy-to-let mortgage broker The Money Centre. "It's quick, which is crucial if the seller needs the cash to pay off debt. What's more, the seller gets to stay in their own home, which can be of huge benefit if, for instance, they have children in local schools."

Nevertheless, ever since sale and rent back started to be offered a couple of years ago, it has courted controversy. "Once the property is handed over, there is no security of tenure. It can be sold by the new landlord whenever they wish," says Andrea Rozario, director-general of Safe Home Income Plans (Ship), an organisation that represents the equity-release industry. "Even more worryingly, if the landlord gets into difficulties, the tenants can find themselves on the street due to repossession proceedings that are none of their doing."

The controversy has intensified since the housing market turned for the worse and arrears problems increased. Ms Rozario reckons sale and rent back landlords are rubbing their hands with glee. "With so many people worried about repossession, they are maximising their opportunities. You only have to open a newspaper to see all the adverts for the schemes."

"The attraction for the landlords is getting the property below market value, but I have heard of some instances of people being offered 60 per cent of market price for their home," says Colin Bayley, a professional landlord from Essex. Ms Sweales goes still further, citing examples of homeowners receiving 50 per cent of the property's true worth – a rate of payment that Ms Rozario brands as "disgusting".

Mr Bayley says that in a unregulated sector, new-entrant landlords are trying to pull a fast one: "There are lots of forums out there about this topic, and when I read them it's frightening. You have people with a few grand in their back pocket simply taking out adverts in local papers and seeing if they can get a property as cheaply as possible, hoping to sell the home from under the tenant for a profit when the market improves. The danger is we all get tarred with the same brush."

This touches on the biggest criticism of sale and rent back – that once new landlords have possession of the property they can do anything with it, getting rid of the old homeowner when the tenancy ends or upping the rent to whatever level they choose.

The National Landlords Association reports that around 2 per cent of sale and rent backs have ended with tenants being booted out of their home, often for non-payment of rent. The NLA's figures, though, relate only to its own members; in an unregulated market, with no compulsion on providers to join an industry body, the overall statistic could be much worse.

The complaints against sale and rent back strike an even more disturbing note when you consider that such deals are being used as a means of providing a retirement nest egg.

"Some older people in their 50s and 60s who don't have a big pension are seriously looking at sale and rent back to release the equity they have in the property," says Ms Sweales.

Mr Bayley says he has been approached by people in this age group and ad- vised them not to go ahead as they could sell on the open market for a higher price than he could offer.

A more common way for people without much of a pension but with a lot of equity in their home to raise funds is to go for equity-release, where the provider pays a lump sum or regular income – usually equivalent to between 40 and 60 per cent of the value of the house – and in return receives all or part of the property when the policyholder dies or enters a care home. Equity release has had its fair share of controversy too, but is now regulated by the FSA.

Unsurprisingly, people in the equity release industry are up in arms about the incursion of sale and rent back providers.

"We are really worried by this," says Ms Rozario. "If you sign up to sale and rent back, you are committing to paying rent, potentially until you die. If you can't afford it in old age, the landlord is perfectly within his or her rights to evict. The potential for abuse is appalling."

In addition, Ms Rozario accuses some unscrupulous sale and rent back providers of "lying" about how equity release works, in order to make their own product look more appealing. "The industry needs to be regulated, and fast. We need to be on a level playing field."

The issue of regulation is being considered by the Office of Fair Trading, which is due to issue a report on the market this autumn. But regulation is probably years away, and in the interim providers are being urged to sign up to a code of conduct run by the NLA. Under the code, people entering sale and rent back have a five-day "cooling off" period between agreeing a deal and committing to it, and are encouraged to take independent financial advice.

Ms Rozario says this is better than nothing: "Certainly, anyone considering sale and rent back should only go with someone who has signed up to the code."

Mr Bayley adds: "We need to get rid of the cowboys. And if that means extra paperwork and regulation by the FSA, so be it."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

    Day In a Page

    Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

    Cameron lowered the flag for the dead king of Saudi Arabia...

    But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Humanity must be at the heart of politics, says Jeremy Corbyn
    Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

    Joe Biden's 'tease tour'

    Could the US Vice-President be testing the water for a presidential run?
    Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

    Britain's 24-hour culture

    With the 'leisured society' a distant dream we're working longer and less regular hours than ever
    Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

    The addictive nature of Diplomacy

    Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
    Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

    Fashion: Ooh, Lady Chatterley!

    Take inspiration from DH Lawrence's racy tome with equally racy underwear
    8 best children's clocks

    Tick-tock: 8 best children's clocks

    Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
    Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

    Charlie Austin: ‘If the move is not right, I’m not going’

    After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
    Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

    The Arab Spring reversed

    Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
    King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

    Academic claims King Arthur was real - and reveals where he lived

    Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
    Who is Oliver Bonas and how has he captured middle-class hearts?

    Who is Oliver Bonas?

    It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
    Earth has 'lost more than half its trees' since humans first started cutting them down

    Axe-wielding Man fells half the world’s trees – leaving us just 422 each

    However, the number of trees may be eight times higher than previously thought
    60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

    60 years of Scalextric

    Model cars are now stuffed with as much tech as real ones