Sale-and-rent-back schemes: The pros and cons

As the Bank of England is poised to raise interest rates for the sixth time in a year, British consumers are feeling the pinch more than ever before.

Variable rate mortgages and loans that were comfortably paid off a couple of years ago are now putting borrowers under serious financial pressure.

British consumers now owe in the region of £1,004,290,000,000, an average of £17,000 for every man, woman and child in the country. In turn, home repossessions are on the up and are at their highest level in years.

There are a number of options open to homeowners who are finding it difficult to keep up with repayments and are in fear of losing their homes.

One solution that is being increasingly touted, and considered by consumers, is the sale-and-rent-back scheme. Basically, a sale-and-rent-back scheme will allow you to sell your home but remain living there as a tenant.

At first glance, this seems like a practical solution, but we urge anyone considering a sale-and-rent-back scheme to exercise extreme caution.

Sale-and-rent-back schemes are completely unregulated and already stories are emerging of people selling their homes for only a fraction of their real value.

In most cases, a company offering one of these schemes will offer to buy the home at 70-80% of its real value, pay all fees and charges related to the sale, and allow the owner to remain living there as a tenant.

Two clear disadvantages are immediately apparent. Firstly, the home owner immediately loses a sizeable portion of the value of the home, receiving, say, just £150,000 when their home is worth £200,000 on the open market.

Although sale-and-rent-back schemes offer a lot of convenience, this is a very big price to pay. Selling your home yourself to get its full market value, paying off the mortgage and finding a new property may be a much wiser option, despite the extra hassle involved.

The second major disadvantage surrounding sale-and-rent-back schemes is that they are completely unregulated, so there are no guarantees about the length of the tenancy or the cost of the rent.

A worst case scenario would be that the person who originally owned the home pays extortionate rent under the scheme only to be evicted after six months. These cases are rare, but they do exist.

However, the schemes remain popular for a number of reasons. They offer a quick solution for people who are in fear of having their home repossessed and who are behind in mortgage repayments. Many sale-and-rent-back schemes promise a one-week turnaround which is tempting to people who want to put their immediate financial worries behind them.

The schemes also promise discretion so there is no social stigma attached. And perhaps most importantly, there is no disruption to the family’s daily routine – no moving, no changing schools and jobs etc.

However, the fact remains that sale-and-rent-back schemes are probably best avoided. Thousands of people find themselves in financial difficulty each year and manage to successfully overcome it.

Before considering a sale-and-rent-back scheme, look at your other options. Speak to a debt counseling agency and see if a debt management plan (DMP) can help. A DMP will calculate all your incomings and outgoings, and how much you can afford to repay. The agency will also help you negotiate with lenders so you may be able to reduce your mortgage repayments to a level you can afford and keep your home.

Another option that could allow you to keep your home is remortgaging. This will allow you release the equity in your home. You can use this money to sort out your immediate financial problems and any money left over can be kept as a safety net in case off future problems.

Alternatively, you could sell up, pay off your debts and move on – probably with some cash to spare. Selling a home and finding a new one to rent or buy is no easy task, but you can take comfort in the fact that you are getting a fair price for your home.

Sale-and-rent-back schemes may offer a quick and easy escape from debt problems, and may be the answer for some people. However, they are unregulated and, in the long run, seem to make little financial sense.