Are property sale and rent back schemes the answer to spiralling debts?

'Sale and Rent Back' schemes might seem to be the solution if you can no longer afford to pay your mortgage but as Christine Toner discovers they sometimes prey on the vulnerable and there are often better alternatives.

With debt in the UK at almost £1.4 trillion it is unsurprising that homeowners are struggling. Repayments for mortgages, credit cards, and loans that, two years ago, were manageable are suddenly too much to handle. Homeowners are seeking a way out and for many, it seems they’ve found a viable solution.

Sale and Rent Back schemes have risen in prominence over the last few years, due in no small part to the ever growing debt mountain in the UK.

But following the interest rate rises of 2006 and 2007 it seems the providers have hit the jackpot. Repossessions are rising and struggling homeowners are desperate.

Enter stage right the sale and rent back providers. The providers will buy the property from the current owners and allow them to continue living there paying rent. It seems practical but is it as straightforward as it looks? And what are the pitfalls customers should look out for?

Due to the nature of the schemes Sale and Rent Back programs prey on the vulnerable. The schemes are usually taken up as a last resort. When homeowners find themselves with no other option but to sell their home the idea of being able to continue living there, as a renter is an attractive option. But their vulnerability and desperation is often taken advantage of. And it is this element that puts Sale and Rent Back schemes at risk of becoming the latest industry scandal.

“Sale and Rent back schemes remind me of the Shared Appreciation Mortgages (SAMs) back in the late nineties, run by banks like Bank of Scotland and Barclays Bank,” says Danny Lovey, proprietor of The Mortgage Practitioner. “The raw nerve on both these schemes is that they take advantage of many people in a desperate situation who are looking for a quick fix to sort their finances and who are at their most vulnerable.”

Shared Appreciation Mortgages involved the lender taking a share of the increase of the value of the property as part of the repayment of the mortgage. However, Lovey says the original valuation was not always correct.

“With SAM’s the solicitors involved were often questionable with regard to their ‘independence’ and there was always the common complaint that the valuations were downgraded and the desperate owners were then placed in a ‘take it or leave it’ situation.”

According to Lovey this is often also the case with Sale and Rent Back schemes. The provider will conduct a valuation of the house and offer to pay you a discounted price. The valuation is often less than accurate and the discount added to this can be anything between 5% and 40%.

Receiving only a discounted price for your property is not the only downside to the schemes. The only guarantee the schemes provide is an Assured Tenancy Agreement(AST). These agreements dictate how long a tenant can stay in a property before a landlord is able to ask them to leave. An AST means the tenant is liable for eviction after either six or twelve months – something many may not be aware of.

“Part of the scam of this is the misconception that you can if you wish remain in the property for the rest of your life paying the market rent,” says Lovey. “But in order for these cowboys to finance the purchase of your property they will be funding it as it were a ‘buy–to-let’ with an assured tenancy agreement and there is nothing stopping them from merely ‘warehousing’ your property to sell on to another landlord.”

In extreme cases the landlord may run into financial difficulties and be unable to pay the mortgage back in which case your house would be repossessed – which is exactly what you were trying to avoid.

The reason these horror stories can occur is Sale and Rent Back schemes are not regulated. Therefore unlike with most financial product providers, which are regulated by the Financial Services Authority(FSA), Sale and Rent Back providers do not have a ‘code of conduct’ to abide by. This is something that the industry is calling for and could revolutionise the way Sale and Rent Back schemes work. But until then consumers are warned to approach the schemes with caution.

“They are very much less than ideal,” says Katie Tucker, technical manager at John Charcol mortgage brokers. “It should only ever be a last resort, if you absolutely can't remortgage, and are willing to effectively lose a great deal of your equity to stay in the same house.”

So what are the alternatives? The most appropriate option is to sell up and move, but this is often not possible, especially if your debts are spiralling out of control.

Sole broker Roy New says the key is communication with your lender.

“If you need a quick sale, due to debt, talk to your lender,” says New. “You may negotiate a better rate / deal, switch to interest only, or even delay repayments to allow you to sell. Also speak to an independent broker, for honest, knowledgeable ‘whole of market’ advice.”

New says consumers should not be under the illusion that lenders want to repossess their home. He claims this is not the case as “it is costly and time consuming matter and often the true value of the property is not realised.”

If homeowners are struggling with their debts entering into a Sale and Rent Back scheme should only ever be considered as a last resort. If you have no other option then, New warns, the providers should be thoroughly researched before any agreement is entered into.

“If the consumer decides to go ahead,” he says, “then as many quotes as possible should be obtained and the companies concerned scrutinized.”