You should think carefully before signing up to a'mortgage rescue' scheme or 'sale and leaseback' scheme. Although arrangements like these can sometimes help homeowners to stay in their home, they may cause more problems than they resolve in the long run.
These schemes are not suitable if your financial difficulties are likely to be temporary. In these situations, negotiating reduced payments with lenders for a few months is usually a better option and will cost you less in the long run.
Sale-and-lease-back schemes operated by private, profit making companies are very different to the Government’s mortgage rescue scheme, which was announced in late 2008.
Who runs these schemes?
This is a very important question. Mortgage rescue schemes can be run by:
- not-for-profit agencies (such as local councils or housing associations)
- mortgage lenders, or
- private, profit-making companies.
It is very important to check whether any scheme you are considering is a profit-making company, as this can be very risky and is usually best avoided.
Unfortunately, there are very few not-for-profit schemes available, although the Government has announced plans to provide funding so that more housing associations and councils are able to provide this service. Please see our section on the Government mortgage rescue scheme for more information.
How do mortgage rescue schemes work?
Mortgage rescue schemes buy your home and rent the property back to you. This allows you to stay in your current home while making it more affordable.
Some schemes may allow you to:
- sell only part of your home, so that the property is owned on a shared ownership basis, or
- buy your home back when your financial situation improves.
These options are usually only available with council and housing association-run schemes - private companies don't usually allow this, but it is worth asking them.
What are the risks?
In some cases, a mortgage rescue scheme may be the right option but you should always get independent advice about both your finances and how your rights would be affected before you take any action. Use our directory to find a local adviser.
Some companies' advertisements sound too good to be true... and they often are. Companies that offer an immediate, easy solution or target customers aggressively should usually be avoided. Be aware that there are significant risks, particularly with privately run, profit-making schemes:
- They often buy homes at well below the market rate, so you could lose a large percentage of the true value of your home.
- They are not regulated. The Financial Services Authority (FSA) does not consider them to be offering a financial product, merely buying a property and renting it out. The Government has announced that it plans to bring them under FSA regulation in future, however.
- Their advertisements are not scrutinised for inaccurate or misleading information and there are no checks as to whether the advice they give you is in your best interests or is the best way of resolving your problems.
- Many schemes give assured shorthold tenancy agreements to the former owners. This gives you very little protection from eviction once you have sold your home. They do not have to prove a reason to do this - as long as they follow the correct procedure the eviction will be legal.
- The rent you have to pay may end up being as much as your current mortgage payments. Rent increases may be very large. This increases your chances of getting into arrears after the sale.
- If a privately run company goes bankrupt after it has bought your home, the property will usually be repossessed by their lender.
What are the benefits?
There are some benefits to these schemes:
- Struggling homeowners get to stay in their homes, avoiding the trauma of repossession.
- Any equity you have can be released to pay debts (although mortgage debts should always be your top priority).
- Both you and your lender would avoid the costs of going to court and having your home repossessed.
When will private sale and leaseback schemes be regulated?
The Financial Services Authority (FSA) has recently announced that it will begin to regulate the private sale and leaseback industry, which will hopefully prevent unscrupulous companies from taking advantage of struggling homeowners.
Partly as a result of pressure by Shelter, an interim regime will be brought in by the FSA from 1 July 2009 to address the most immediate problems faced by consumers. This will be followed by a more comprehensive regime which will start on 30 June 2010. It is not clear what changes will take place as a result of regulation, and extreme caution is still advisable when it comes to sale and leaseback schemes.
Would I be eligible for housing benefit after the sale?
Not necessarily - so don't assume that this will be the case! If you do sell your home through a sale and leaseback scheme, your entitlement to housing benefit will depend on:
- whether the council believes that you did everything you possibly could have done to avoid selling your home and
- whether you qualify under the income and capital rules.
You may not be entitled to claim housing benefit for up to five years. See our page on housing benefit after a sale and leaseback deal for more infomation about the rules, and get independent advice about this issue before you sign up.
Am I eligible for a sale and leaseback scheme?
Remember that just because you're eligible doesn't necessarily mean that it's your best option. Always get independent financial advice before you decide.
If the scheme is run by the local council or a housing association, there are usually rules on eligibility. For example, they may only be available to people who:
- are facing a large reduction in income
- have not yet built up high levels of mortgage arrears
- need to stay in the area for other reasons, such as schools, work or support
- are able to make small monthly payments.
Some schemes will only offer a service if there is a shortage of social housing in the area and the property value is below a certain amount. Ask you local council and/or your lender whether there are any schemes you can apply for.
Before you contact a scheme
To avoid losing out financially, you should consider doing the following:
- Continue to pay as much as you can to avoid the build up of further arrears. If you do end up in court, the court will take this into account when making its decision.
- Get debt advice from a not-for-profit agency such as National Debtline. Specialist debt advisers can make a full financial assessment and help you work out a plan for clearing your debts and covering your living expenses. Most private debt companies that advertise for customers should be avoided, but if you do use one, always check exactly what you will have to pay for their service.
- Consider negotiating with your lender first - most lenders consider repossession to be a last resort and are willing to discuss other ways to make your mortgage more affordable.
- Get an independent valuation of the property from an established estate agency in your area, so that you can compare this with any valuation the mortgage rescue scheme gives you.
How can I find a scheme?
It is worth asking your mortgage lender if they operate this sort of scheme.
Alternatively, contact your local council to find out if there are any reputable schemes operating in your area.
Remember that schemes advertised in newspapers or on TV are usually profit-making companies and may not provide a real solution to your problem. Always take the following precautions:
- Speak to at least three providers.
- Check that they have a website and office address.
- Find out how long they have been operating for.
- Check out the company through Companies House to be sure that it is financially stable.
- Request a contact number for a referral point who has seen sales go through successfully.
- Request a contact number for a tenant who has experienced the process.
- Ask whether they are affiliated with any trade associations or regulators, such as the Housing Ombudsman Service.
Always get independent advice before signing up for any scheme. You could try contacting a Shelter advice centre, National Debtline, Citizens Advice or a solicitor.
What else should I check before signing up?
If, after getting independent advice, you do decide to opt for mortgage rescue, be sure to get confirmation in writing of all the charges you will be expected to pay, including:
- the rent
- administration charges
- legal and financial costs associated with selling your home to the scheme
- additional payments
- future rent increases - how often can the rent be increased and how will increases be calculated.
- What percentage of the market value will you be paid?
- Will the valuation be done by an independent surveyor? (If not, get your own valuation so that you can compare - estate agents will provide this service for free).
- Can you maintain ownership of part of the property?
- What type of tenancy would you have? Remember that an assured shorthold tenancy does not give you much security as it means that you can be evicted without a legal reason.
- What protection from eviction would this give you?
- How many people have they evicted for rent arrears?
- How do they deal with rent arrears? What procedures do they follow? Can they offer any support if you fall into arrears?
- Can you buy back a stake in the property (this is called 'staircasing') if your financial circumstances improve? If so, on what terms and what charges might be involved? Who decides the value of the property and what happens if there is any dispute over this?
- What would happen if the company developed financial problems? Do they have insurance or a bond in place to protect tenants' homes?
