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Your Money > Mortgages Articles > The firms making...
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By Sarah Modlock
I'm sure that the idea of having your home repossessed fills you with complete dread. It became a terrible reality for 45,000 households last year - a figure which is expected to rise to 75,000 homes this year, says the Council of Mortgage Lenders. But is enough being done to help home owners and are some companies cashing-in on their misery? Five tips if you're struggling with your mortgage payments The government has told lenders to tread carefully and be supportive of the millions now struggling to keep up with mortgage payments in a tough climate. But has anyone told the courts? They have the option to apply a law which would allow home owners more time to repay arrears according to the Centre for Policy Studies (CPS). The think tank says an estimated 100,000 homeowners could be saved from losing their homes if judges used a legal ruling that allows borrowers to spread repayments over their whole remaining mortgage term rather than forcing them to pay up in the standard two to four years. And as the Financial Services Authority warns that one in five - or 2.5 million - home owners could fall into negative equity as the property market corrects, the unthinkable is becoming possible for many. Sale-and-rent-back If you are facing repossession, there's no doubt you will be exploring every possible avenue to avoid it. You may have run out of options by the time you are approached with an offer to not only buy your home but then rent it back to you. But is this really the helpful solution it appears to be? Quite possibly not according to the Office of Fair Trading which has launched an investigation into 16 firms operating these schemes. But how do they work? Sale-and-rent-back agreements allow homeowners to sell their property at a discount price to a company, which will then rent it back to them. The property will be bought for around 60% or 70% of its market value, with the sale-and-rent-back company usually covering all fees and costs and then rented back at market value. Their big selling point is that home owners can use the cash to pay off their mortgage and debts and remain in the home they love. Some companies even offer the opportunity to buy the house back at market value at a later date. No one seems to know how many sale-and-rent-back firms are currently operating but some estimates put the number at more than 1,000. The sell These firms know just what buttons to press. Often, they promote the fact that they can wrap the whole thing up within a week - ideal if you are at the end of your tether and have nowhere else to turn. They also promote discretion, saying that neighbours won't know you have lost your home and your children can continue to attend the same school. They may say that you will only get 85% of your property's value if you sell it on the open market. But as they are paying for the survey on your home, there is an incentive for the house to be undervalued, giving them a chance to offer you less money. It's important to remember that the way they make money is by paying as little as they can for your property. The drawbacks Well for starters you lose out on the value of your home by selling it cheaply. For example, if your home is worth £150,000 and you accept 60% of its value then you are losing a massive £60,000. Then by renting it back you are also paying the new owner's mortgage for them. Much more scary is the small print which could see you evicted after six or 12 months as some of these firms make short term tenancy part of the agreement but may not make this clear. Many of these firms sell their properties on to other people such as buy-to-let landlords. If the new owner decides to sell or finds they cannot keep up mortgage payments themselves then you will be at risk of losing your home again.
As a relatively new market, there is more than the fair share of people trying to make a quick buck operating alongside those who want to do things properly and preserve a reputation for longer-term business. But there is no way of telling which of these you are dealing with. Bear in mind that it takes no time at all to get a website and advertising campaign together. These companies are currently unregulated (more on this below) and offer no security in terms of tenancy or rent levels. Adam Sampson of housing charity Shelter said some pay homeowners only half the market value. He said others did not honour promises that former homeowners could stay in their property as a tenant for life: "People are being ripped off. We are seeing people who are getting only 50% or 60% of the value of their homes instead of the 70% to 90% they should be getting. Many of the promises that are made that people can stay in their homes for the rest of their lives are not being honoured." The investigation In October last year the Office of Fair Trading (OFT) recommended that the sale-and-rent-back sector needs statutory regulation with better protection for consumers. The OFT's report says that:
The OFT has called for regulation of this sector by the Financial Services Authority (FSA) and requests that new regulation should include an obligation on sale and rent back firms to be more transparent about the initial valuation and sale price, the terms of the tenancy and the amount of rent to be paid. In particular, firms must offer forms of tenancy that match the assurances they give to customers, and a requirement of firms to tell consumers about the free, independent advice available to them before they decide to sell. They would also like to see firms who fail to honour their commitments offer redress to customers. The Chief Secretary to the Treasury, Yvette Cooper, said: "Many people are worried about their homes and their mortgages right now. Unscrupulous companies must not be allowed to exploit people when they are vulnerable with dodgy deals that end up pushing people out of their home. The OFT found some shocking cases. That's why in this consultation the Government is proposing tough new regulation to give vulnerable homeowners better protection when they need it." Regulation of sale-and-rent-back The good news is that from July 2009, these firms will be regulated by the FSA and the firms will need 'interim permission' if they want to carry on trading in the meantime. Of course the reputable firms will welcome this regulation. The consumer organisation Which? welcomed the FSA's new role, and said people should avoid going into sale-and-rent-back schemes until formal regulation begins. "In the current economic environment, consumers are at significant risk of not getting a fair price for their home and facing the risk of eviction in as little as six months," said Dominic Lindley of Which?. This was supported by the Council of Mortgage Lenders, which said it had been calling for formal regulation for the past two years. "Lenders cannot always avoid repossession action through the courts, and sale and leaseback could potentially be a realistic alternative for some people as a last resort," said the CML's Michael Coogan. "But basic regulated standards of fair treatment and redress are essential, to avoid vulnerable households being exploited by unscrupulous operators," he added. 1) If you need a quick sale due to debt problems, speak to your mortgage lender. Mortgage companies are required to offer assistance to borrowers in financial difficulty and have been given orders by the government to view repossession as a last resort. Your lender may be able to find a cheaper deal, switch you to an interest-only loan, or delay repayments to give you time to sell. 2) You could also put your property on the market, taking advice from estate agents about how to secure the best offer in the time you have. 3) Citizens Advice, National Debtline and the Consumer Credit Counselling Service can help with budgeting and negotiating new repayments with creditors. 4) Anyone considering sale-and-rent-back should first explore all other options. If they decide to push ahead, it is essential to take great care in getting a number of quotes, check out the company dealt with and ask serious questions about tenancy details and rights. If you are concerned about whether sale-and-rent-back is the right product for you then seek independent advice from your local Citizens Advice. 5) If you are concerned you have been unfairly treated by a company offering sale-and-rent-back then contact Consumer Direct on 08454 04 05 06. Useful links: |
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