Mortgage rescue schemes (sale and rent back)

On 3 February 2012 the Financial Services Authority issued a statement saying that it was temporarily closing the sale and rent back market. This closure follows on from a review of all regulated sale and rent back firms that found most transactions were unaffordable or unsuitable and should never have been sold.

If clients who have existing sale and rent back agreements are worried they should contact their sale and rent back agent or seek legal advice.

Mortgage rescue schemes (often called Sale and rent back) offered by private companies are sold on the basis that they offer an immediate solution to homeowners’ financial problems, and allow them to stay in their current home. These schemes may also be offered by brokers and private individuals where it may be difficult to tell whether they are companies or not.Under privately run schemes, property valuations are often made not by an independent surveyor, but by one employed by the company, and homes are usually purchased significantly below the market rate. On the sale of the property, the company normally grants an assured or short assured tenancy to the former owner. The homeowner(s) should try to negotiate for an assured tenancy because this will give better security.

Since 30 June 2010 firms offering sale and rent back schemes have been regulated by the Financial Services Authority (FSA). The regulations included the following:

• a security of tenure for a minimum of five years

• a 14-day cooling-off period to give homeowners more time to make decisions on sale and rent back

• prohibition of high-pressure sales techniques and the use of terms such as 'fast sale', 'mortgage rescue', 'cash quickly' in promotional literature

• ban on cold calling and promotional leaflets through the letter box

• the firm is fit and proper.

It is possible to contact the FSA to check if a firm is registered.

Lenders may offer these rescue schemes where they accept that the borrower has suffered a significant reduction in her/his income but is able to continue to make regular payments.

The other criteria are that:

• arrears are not unduly high (offering protection to the lender in the event of a sale)

• the borrower has a particular reason for wanting to continue to live in the house (for example, children attending local school)

• re-housing by the local authority is difficult (for example, lack of local housing for families).

Mortgage rescue schemes may be appropriate for borrowers who have reason to expect that their financial problems are temporary, and that their finances are likely to improve again. In most schemes, the borrower will have the right to buy the house back.

Schemes may also be available from local authorities and RSLs. These schemes are likely to have strict eligibility criteria.

Typically, a local authority or housing association buys the house from the borrower, paying off the mortgage and obtaining a discharge of the lender's security over it. The borrower then becomes their tenant, paying rent.

Alternatively, a housing association buys part of the house. This is known as shared ownership. The borrower becomes part-tenant/part-owner and retains the right to buy back the housing association's share in the property.