Eviction threat of sale-and-rent back plans

Published 25th Jan 2010

Older homeowners who need to unlock cash from their property could be forced into the hands of unscrupulous sale-and-rent-back operators because the equity-release market has shrunk so much, with deals either too expensive or unavailable.

The sale-and-rent-back sector has been regulated by the Financial Services Authority since last July, but many cowboy companies are still preying on the vulnerable.

Sale-and-rent-back companies buy property at a discount – typically about 60 per cent of the value – and let it back to the owner at the market rate. It often appeals to those who need a lump sum but don’t want to move.

But unlike the majority of equity release plans – the usual route for homeowners to free up cash from their property – there is no guarantee with sale-and-rent-back that the occupier can stay on for life.

Many companies immediately sell properties to buy-to-let landlords, who may increase the rent or subsequently evict tenants.

The number of homeowners releasing equity to pay off unsecured debts rose dramatically from 11 per cent in 2008 to 35 per cent last year, according to specialist adviser Key Retirement Solutions’ annual market survey.

Nigel Hare-Scott, managing director at leading equity-release adviser Home and Capital in Bedford, says: ‘Since the credit crunch, funding for equity release has all but dried up. Costs and interest rates have gone up. Most providers have dropped out of the market or drastically cut their business.

‘Borrowers who in the past opted for equity release to pay for extras such as cruises and home improvements are staying away from the market. But I fear for those who are desperate to unlock cash from their home to supplement a low pension income.

‘They could be forced into the hands of sale-and-rent-back firms where they will get poor value, could be ripped off or badly treated.’

Prudential pulled out of equity release late last year after similar withdrawals by Bradford & Bingley, Northern Rock, Godiva Mortgages, Newcastle Building Society and In Retirement Services.

In the past two years the market has shrunk from 21 providers to five main players – Aviva, Just Retirement, LV=, Hodge Lifetime and Stonehaven.

Hare-Scott fears sale-and-rent-back companies will cash in on homeowners’ desperation.

‘Because there is less advertising and far fewer providers of equity release, many consumers may not realise there is this equity-release option,’ he says.

One rule of equity-release plans under the unbrella of Ship (Safe Home Income Plans), a voluntary code of conduct for providers, is that borrowers can remain in their homes for life or until they move into care.

One alternative to sale-and-rent-back is to downsize.

While property prices have fallen in the recession, sellers will still get a higher price on the open market compared with sale-and-rent-back.

Experts also recommend that older homeowners with money worries speak to their family, where appropriate. It may be that adult children can afford to give or lend money to their parents if cash is needed for something specific such as home improvements.

Equity release is still available, although the choice of plans is limited and costs are higher than a year ago. Once you have decided this is the best route and spoken to family and a solicitor, it is a good idea to go to an independent specialist adviser, such as Home and Capital or Key Retirement Solutions, to ensure you consider all routes and their consequences.

Sandra Waters, 71, took out a home-reversion plan with Home and Capital on her home in Edgware, north London, in 2007 before the equity-release market started to collapse.

It enabled the divorced former pharmacist to release 100 per cent of the equity in her two-bedroom maisonette as a cash sum, without having to move. With a reversion plan, borrowers do not get the full value of their property, but usually retain the right to stay for life rent-free.

The other main type of equity-release plan is a lifetime mortgage, where homeowners receive a loan based on part of the equity in their home. The interest on the debt is usually fixed but rolls up during the homeowner’s lifetime and is only payable on death, or if they need to move into care.

Plans under the Ship voluntary code ensure the mortgage debt can never be higher than the value of the property at the time it is sold.

Sandra says: ‘My property may have fallen in value during the recession so I feel I released the capital at the right time. I love my maisonette and didn’t want to move. I don’t have children and I wasn’t concerned about leaving a legacy so the reversion plan suited me.’

Source: ' Mail on Sunday '

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