The dream of owning a place in the sun has turned into a nightmare for Brits struggling to meet mortgage payments on a property that has sunk in value. But a new UK-based scheme claims it has a solution which could allow owners to bail out without incurring the penalties of repossession and negative equity.
It's the brainchild of financial services group Marcus James which has just launched the Recovery scheme in Cyprus. For a fee of £495 an owner places a property with the company which then finds a new investor to "adopt" the property and take over the mortgage payments for an upfront fee of £5,000. The property is, in effect, sold – or rather transferred – for the price of the outstanding mortgage.
Owners lose their original deposits plus any money they've spent on their homes. But Tony Barker from Marcus James says many are prepared to do so to escape the financial burden. "I've met so many people who just want to wash their hands of the whole thing. They want to cut their losses and walk away from a property which has become such a burden."
How does it work? The company claims to have unofficial agreements with local banks in Cyprus, allowing a third party – the new investor – to take over mortgage payments on a property. The title deeds are transferred, but held by the company's local lawyer and in the event of any default, the contract is withdrawn.
"Banks and developers in Cyprus are keen to support the Recovery scheme," says Mr Barker, "the banks to avoid significant default, and developers to keep the market as buoyant as possible."
But there are serious questions to ask about the scheme, says Nick Hopkinson, a director of Property Portfolio Rescue. "Isn't the scheme just getting new investors into the same problems as the original buyers but on a different timescale? Even if deposits are supposedly 'gifted', where is the proof that the property assets were ever worth what was claimed?"
Mr Hopkinson says that anyone thinking of buying property overseas needs to be aware of the risks. People could end up with a rapidly decreasing asset but still need to meet the mortgage payments which could soar if interest rates rise.
Overseas property purchases have other risks as well, he adds. "Every country has inherent legal ownership, political, currency, tax, property management and economic risks. I doubt whether the original buyers were properly informed of these risks and question whether any buyers being sold a 'distressed bargain' will be informed either."
For example, the lack of a title deed could prevent the sale of a property. Some 130,000 properties in Cyprus are without title deeds. "It can take about 12 years to get the Land Registry to issue a title deed," says Nigel Howarth of Cyprus Property News, "and until that time you often have no autonomy to sell." One of the reasons title deeds are so elusive is that the land itself may be mortgaged by the developer. In Cyprus "corruption is endemic", claims Mr Howarth. "A number of property lawyers are in the pockets of the developers and won't have told you that the land is already mortgaged, so denying you title."
Chris Eracleous, an independent financial adviser from Daveriye Mortgage Solutions in Cyprus says there is an issue regarding the sales of property on land which itself is mortgaged. "But it's always been general practice for banks to retain a portion of off-plan sales to pay off the initial mortgage on the land. Problems arose when values started soaring and the smaller developers were able to remortgage on the strength of that. Regulations have become stricter."
Mr Howarth is wary of schemes that specialise in taking advantage of "distressed sellers". "They may have made the decision to purchase in haste. They need to avoid making an equally poor decision when selling their properties." He stresses the need for buyers to talk to their banks. "They may be able to take a payment holiday or restructure the loan. They should also be looking for long-term rentals."
Marcus James Group hopes to roll its scheme out in other parts of Europe, notably Spain. With strict legislation governing such financial transactions this may be a tall order. Says Mr Barker: "I'm aware that it's a breach of a mortgage agreement, but such difficult times need drastic measures."
What's in it for the buyer? The principal appeal of Recovery is that no deposit is needed, aside from the £5,000 fee, with a mortgage already in place.
But the apparent ease of taking over a mortgage shouldn't be the reason to buy a property abroad, says Nick Hopkinson of Property Portfolio Rescue. "Without local, expert advice and deep reserves of cash it is foolhardy for an investor to just take a punt because someone is pitching it," he warns.