Sale and leaseback under the spotlight
With the Treasury again being urged to regulate sale and leaseback, Barney McCarthy takes a look at the sector
With repossession figures predicted to rise in 2008 and borrowers coming to the end of fixed-rate deals experiencing payment shock as their monthly repayments soar, it is not hard to see why homeowners are feeling the pinch. One method of freeing up some cash that has come to the fore in the last year or so is sale and leaseback. This is when companies offer to buy properties from homeowners at less than market value and then rent them back to the former owner.
Steve Belara-Bell, director of sale and leaseback provider Lease4Life, says: “Sale and leaseback is beneficial for some homeowners, but if you want security then a lifetime lease offers that. Many providers put people on assured shorthold tenancies which don’t offer much protection.” He adds that it is not just those facing repossession who revert to the schemes, but also middle-aged homeowners looking to free up some cash to enjoy life more.
Although the schemes sound like a good solution for borrowers facing mortgage problems, there are growing concerns about consumer protection given that such transactions are not regulated. Trade body the Council of Mortgage Lenders (CML), Citizens Advice and charity Shelter jointly wrote to the Treasury late last year calling for regulation of the activity.
The CML also wrote separately to the Treasury this week (8 February) to outline the lengths lenders go to in order to avoid repossessing properties. Michael Coogan, CML director general, says: “Lenders take their responsibilities to borrowers facing repayment difficulties very seriously, and many go to exceptional lengths to provide debt counselling, reschedule payments, extend loan terms, or in some circumstances even allow payment breaks. They abandon repossession action right up to the last moment if they can reach a payment solution consistent with both the borrower’s and the lender’s interests.”
Freeing up funds
The main concern over sale and leaseback is that it is not regulated, meaning that consumers aren’t protected if something goes wrong. This is particularly worrying given that the people it is aimed at are vulnerable and may feel forced to sell their property for far less than it is worth.
The plans fall outside the remit of mortgage regulator the Financial Services Authority (FSA). Most sale and leaseback schemes fall outside the FSA definitions of regulated products like home reversion plans, and cynics say this is intentional to avoid governance.
Andrea Rozario, director general of equity release body Safe Home Income Plans (SHIP), says it is important to differentiate between equity release and sale and leaseback, two very different types of scheme that are often confused. “There is a potential market for sale and leaseback, but it has to be regulated as, at present, anyone can set a company up. Although it may look attractive because of the initial cash lump sum received, the client has no security of tenure and still has to make payments. If the company that has purchased the property goes bust, they could find themselves out on the streets.”
Rozario also stresses that equity release has the advantage of a no negative equity guarantee – meaning that you will never owe more than your house is worth – and is usually accompanied by independent legal advice.
The FSA’s stance is that sale and leaseback is a property transaction rather than a financial transaction and is similar to its position on regulating home reversion plans a few years ago, before it brought them under its scope last year.
Although the FSA already regulates the vast majority of financial services, industry bodies such as the CML are hoping it will widen its remit to cover housing issues such as this, where homeowners may be at risk.
Tags: mortgage, mortgages, News, Equity release, mortgage brokers, mortgage lenders, uk news, uk mortgages
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