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What are sale-and-rent-back schemes?

Also known as mortgage rescue, sale-and-rent-back companies typically focus on homeowners who are having difficulty making their mortgage repayments and are facing repossession.

These firms buy people's homes from them at much less than their market value - and then rent those homes back to them at market rates. Some firms claim to offer tenants the chance to buy their homes back - at market rates - at some point in the future.

The sale-and-rent-back company concerned will generally bear all fees and costs. The homeowner-turned-tenant can then use the cash he or she receives to try to clear their mortgage and debt commitments.

The firms emphasise how quickly, simply and painlessly the whole thing can be sorted out. The payment and handover can sometimes occur in a week or less, with the company taking care of all the legal costs and fees.

Many companies will promise complete discretion, and also highlight the benefits of staying in the same home (for example, your children being able to continue to attend the same school and you remaining near your work, family and friends).

However, you need to look at sale-and-rent-back very closely before taking the plunge: you could be swapping one bad situation for another.

Risks and drawbacks

Poor value: To maximise their profits, these firms typically give homeowners much less than their property is worth. As a seller, you may receive just 60-70% of the market value of your home - or even less.

Sale-and-rent-back firms typically target vulnerable people in serious financial difficulties, and will exploit their desperation to drive down the selling price of the property.

Lack of security: Many sale-and-rent-back companies imply that tenants can stay in their homes for a long time after they've sold them. Some even suggest they can stay as long as they want.

However, in recent years, the sale-and-rent-back industry suffered from a lack of regulation and despite the assurances, many ex-homeowners were suddenly evicted after as little as six or 12 months - either because the company wanted to sell the property, or because it wanted to bring in tenants capable of paying higher rents.

In June 2010 the Financial Services Authority (FSA) introduced rules meaning that anyone who swapped home ownership for a sale-and-rent-back tenancy would be guaranteed a tenancy of at least five years.

However, some unscrupulous sale-and-rent-back firms will still try to take advantage of tenants in other ways. After the company has purchased the property, rent payments may end up being as high as mortgage payments previously were. Unregulated rent increases can be levied at little or no notice.

In some cases, the sale-and-rent-back companies have also gone bust or have sold the firm to someone else, meaning the tenancy has instantly come to an end and the former owners have become homeless.

Other options

Sale-and-rent-back should only be undertaken as a last resort. Before you get involved in this sort of arrangement, carefully consider all the other options open to you.

Talk about it: Speak to your existing mortgage provider, and be honest about the fact that you're having difficulty making repayments.

Repossession isn't a very attractive option for lenders (it can be expensive and complicated). You may find you're able to switch to a cheaper repayment plan - for example, an interest-only deal.

If you have other debts as well, speak to a free, impartial debt counsellor: The Consumer Credit Counselling Service (CCCS), your local Citizens Advice Bureau and National Debtline are all good places to start.

Some councils and housing associations offer mortgage rescue schemes where they purchase part of the home and the rest of the property will remain in the hands of the homeowner – effectively a shared ownership deal.

Lender Initial Rate Duration Standard Rate Overall Cost For Comparison Max Loan To Value Fee
2.59% 2 years 5.69% 5.4% APR 75% £999
2.69% 2 years 4.99% 4.9% APR 75% £495
2.94% 2 Years 5.69% 5.4% APR 75% £199
2.99% 2 years 4.99% 4.9% APR 85% £495
2.99% 3 years 4.99% 4.6% APR 70% £499
3.0% 2 years 5.69% 5.5% APR 80% £999
3.19% 5 Years 4.79% 4.2% APR 80% £995
3.35% To Jul 2014 4.95% 4.6% APR 75% £999
3.5% 2 years 5.49% 5.1% APR 75% £595
3.84% 2 years 3.94% 4% APR 90% £499

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