Theresa Hunter: Seller beware: mortgage-to-rent can leave you homeless

Published on Saturday 30 August 2008 15:09

WHERE there's muck there's brass, or so Yorkshiremen say. It means there's money in dirty work. And in today's world of indebtedness and falling house prices, down 10.5% in the last year according to Nationwide, there is plenty of muck to be found among the swill of human misery.

Unless the economy turns up soon, there will be wretched times ahead as more families reach the end of their financial tether, having exhausted all options.

Yet one man's repossession is another's route to riches. Private companies are shooting up everywhere like snowdrops in the spring, offering to solve all your problems at a stroke.

There are two great lies regularly sold to those in debt. Firstly, you are told your worries will be over if you roll all your loans into one new consolidated debt, thereby cutting repayments.

The second is that by selling your house to a mortgage-to-rent company, or a rent-back scheme, you can stay in your own home for life, clear your debts and start afresh; all in the space of a three-minute phone call.

The truth is somewhat different. Rather than solve your problems, opting for the first can make it more, not less, likely that you will lose your home, while watchdogs are becoming deeply concerned about the activities of private mortgage-to-rent schemes.

The Office of Fair Trading is currently investigating the way they operate and is due to publish a full report in October after a range of bodies including the housing charity Shelter, the Citizens Advice Bureau and the Council of Mortgage Lenders called on the Treasury to introduce laws to control their activities.

With debts, the important first step is to prioritise them. You must pay your council tax or you could go to jail. Then you must pay your mortgage or rent or you could lose your home. Next come gas and electricity, because you could be cut off.

But the bottom line with credit card and other personal loans is that there is very little lenders can do to recover this money. They can take you to court and make life unpleasant, but they can't get blood out of a stone, and they can't repossess your home.

For this reason there is no sense in swapping 'unsecured' credit card and other debt into a consolidated loan which is then 'secured' on your property, thereby increasing the likelihood that if your financial difficulties persist you'll end up on the streets.

Reputable mortgage lenders are doing everything they can to help struggling households, by allowing borrowers to cut monthly bills by taking a mortgage holiday, paying significantly reduced monthly commitments or switching to an interest-only loan.

Regrettably, even this may not be enough to rescue some households. Those with fluctuating, seasonal or unstable earnings or employment may be better off renting.

In this case the Scottish Government has a mortgage-to-rent scheme which it runs in partnership with housing associations throughout Scotland. Essentially, the housing association buys your home but you get to stay in it as a tenant. However, your interests are protected throughout.

For example, an independent valuer ensures you get a fair price for the property and are charged a fair rent. You will usually be offered the chance to repurchase in the future. Any work which needs doing is carried out as a matter of priority.

Yet private companies are moving into this area in a big way, and desperate families are all too ready to clutch at straws.

These private outfits promise a quick sale, offer to rent your home back to you for life, and some even guarantee you can buy it back again at a pre-determined price whenever you like.

But anyone tempted to use one of these firms should think carefully about what they are getting involved in, because reports are growing that those who do come out badly bruised.

The rent-back company decides what your property is worth and offers you this price minus a hefty discount of, typically, 30%. There is no independent valuation. If there is equity in the home you are squandering a valuable asset, and should the settlement not clear all outstanding loans you could be hounded by debt collectors for years.

Even that's not the half of it. Rental agreements mostly operate as assured shorthold tenancies, offering scant security. There is little to stop the landlord increasing the rent massively in the future or simply asking you to leave. Should the company go bust or be sold, then your rights are even more precarious.

The same applies to the promise of a guaranteed buyback. That guarantee is only as reliable as the individual standing behind it. As most of these are given by unregulated one-man bands, they are little better than worthless.