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
Sunday 10 August 2008
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."
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