W hile Northern Rock may be dominating the headlines, Mortgage Solutions has been contacted by several industry figures detailing a worrying trend in the equity release markets. There has been an increase in promoting ‘sale and rent back’ schemes – a completely unregulated sector of the property market, which is nonetheless partially aimed at one of the most vulnerable parts of that market, the elderly.
While the idea is basic, clients sell their house to a landlord at a discounted price and then pay a market rent to remain in the property.
Andrea Rozario, director at Private Finance is concerned at these schemes marketing. She says: These schemes are a potential major problem for this industry. These schemes are completely unregulated, buying peoples property at knockdown rates and renting back with no security of tenure at full market rental rate.”
Noting that some of these schemes’ websites claim to be a better solution than equity release for the elderly she adds: “Anyone can offer these schemes and there are no promotion restrictions. They are targeted at those who are vulnerable because they are about to be repossessed and the elderly. They are making out that this is more advantageous than equity release, but there is no security and there is no redress. They are nowhere near as secure as equity release schemes. Customers need clear guidance and here there is no requirement to take legal or even financial advice. The community of financial services should be aware of the pitfalls of these schemes.”
Although aimed at those in debt, rather than the elderly specifically, these schemes have already spawned their first ‘scandal’. The landlord usually takes out a loan in order to purchase the property and therefore the tenant is effectively paying the loan for the landlord. This raises the problem of what happens if the landlord, while collecting the rent, does not make payments on the loan. Effectively the house will be repossessed and the tenants evicted.
This is the current scenario in at least two Merseyside cases, where families are to be evicted when their houses, which they once owned, are repossessed later this month. Local MP Frank Field has become involved in these cases in an attempt to stop the families being made homeless. Field has also asked the Treasury Select Committee to look into these schemes.
Gerald Whelan, a director at Birkenhead-based equity release broker The Way Ahead, says: “We feel, as we are sure Field does, that some form of regulation is needed in order to protect consumers at what must be one of the most financially vulnerable times of their life.”
Lack of security
Whelan, who sees the elderly offered these schemes on a daily basis, also highlights the type of tenancy offered the clients of these chemes. He says:”The problem with this type of scheme is that the tenant only has security of tenure for a limited period of time as they are usually set up using an assured shorthold tenancy.
“An assured shorthold tenancy is a kind of assured tenancy that offers the landlord a guaranteed right to repossess his property at the end of the term. In fact, it does not necessarily have to be ‘short’ – assured shorthold tenancies set up after 28 February 1997 can be for any length of time the landlord wishes to offer.”
Whelan is also sceptical whether these schemes offer value at all. He cites a recent case that he had used as a comparison test. The client, aged 70, was offered £105,000 for a property valued at £150,000 (70%) with a monthly rent of £625. At its simplest level, if the client lives till he is 80 and the rent doesn’t increase, he will pay back £75,000 over ten years in rent. This means the net benefit to him is £30,000,” says Whelan.
He used a comparison from The Exchange to obtain the maximum quotes for lifetime mortgage (Stonehaven) and reversion schemes (Neville James). Whelan also calculated the Stonehaven interest owed at the age of 80, and assumed house prices will grow at an average of 6% for the next ten years.
If the client died aged 80, the overall benefit to the family – initial release to the client plus what is left for the children – would be £200,251 for the lifetime mortgage, £76,500 for the reversion scheme, as he had to sell the whole house, and £30,000 for the sale and rent back.
Whelan says: “I am prepared to concede that in certain exceptional circumstances, sale and rent back may be an option – I just have not found it yet.”
Selling your home for tens of thousands of pounds less than it is worth is not an attractive prospect. But those fearing repossession due to mortgage arrears and facing large personal debts may see it as a simple way out of trouble. Deals are advertised on the basis that they can be conducted swiftly and quietly.
The Citizens Advice Bureau (CAB) is also raising awareness of such schemes. According to the CAB, some home owners who are in a vulnerable state due to money worries are selling their homes at well below the market value – in some cases up to 65% below. It adds that companies operating such sale and rent back agreements are typically offering a six-month assured short-term tenancy. The CAB is this month urging the Government to act now to prevent home owners in financial difficulties being exploited.
Rozario concludes: “As an industry, we need to make the differences clear. We need to fight back. We should issue some sort of circular to the public, either through the FSA or a trade body, making it clear that these schemes are potentially dangerous, although there are companies out there trading properly who want to be regulated.” n