If you have mortgage arrears, are facing repossession or have other financial problems, we advise you to treat with caution any product that appears to pay off your debts and allows you to remain in your home without selling it immediately.
Products or agreements fitting this description can include Exchange with Delayed Completion (EDC) or Lease Options contracts. We are concerned that EDCs and Lease Options are being sold by unauthorised firms, thinking they can avoid our regulation because the sale has not been fully completed. However, if the product or agreement allows you, as the owner, to remain in your property, it is likely to be a regulated sale and rent back (SRB) agreement. If it is, the firm or individual providing the product must be authorised by us for SRB activities. If you deal with unauthorised firms you are exposing yourself to increased risks and no regulatory protections.
What are SRB agreements?
Regulated SRB agreements are where you sell your home, commonly for less than its open market value (typically around 30% less), and in return you are allowed to remain in your home as a tenant for a minimum period of five years. You may have to leave your home at the end of this tenancy period and may also have to leave if you breach any of the terms of the tenancy agreement.
What are EDC contracts?
These are contracts where you agree, with a prospective buyer, a sale price of your home and exchange contracts with the prospective buyer who pays you an agreed deposit sum. Completion of the sale of your home is then delayed for a number of years. This is not a SRB agreement if you then move out.
However, if contract allows you to remain in your home, it is likely to be a regulated SRB agreement, so the firm or individual needs to be regulated by the FSA.
What are Lease Options?
These are similar to EDCs, where a prospective buyer of your home pays you an agreed upfront amount in return for the right to buy your home (at its then value) at some point, typically a number of years, in the future. As part of this deal, the buyer would normally take up tenancy of your home in return for paying your mortgage and you move out. This is not a SRB agreement as you have moved out.
However, if the Lease Option allows you to remain in the property and make regular payments to the prospective buyer instead of paying your mortgage, this is likely to be a regulated SRB agreement, so the firm or individual needs to be regulated by the FSA.
What are the risks?
Unlike normal SRB, under these arrangements you remain responsible for the property and mortgage even if the prospective buyer takes over making the payments to your lender. So if for any reason the prospective buyer gets into financial difficulties and walks away from the deal, you will be responsible for any debts or missed payments.
If you are currently struggling to pay your mortgage and are offered the option of staying in the property and paying rent to the prospective buyer, you need to consider carefully whether you will be able to afford the payments.
If the firm/seller is not authorised, you will not be covered by the Financial Services Compensation Scheme (FSCS) or be able to raise a complaint with the Financial Ombudsman Service (FOS) if things go wrong.
You may have to leave the property, or sell it at a reduced price, if you do not keep up with the monthly payments.
You could be agreeing to unfair contract terms without considering the longer-term implications.
Even if you are not in arrears, but are looking to raise cash from your home, you should treat these products with caution. In most cases homeowners are likely to be better off selling their home normally rather than using these riskier alternatives.
What should you do next?
If you are considering one of these agreements, we urge you to check the details of the contract.
Check our Register to see if the firm/seller is regulated by us. If not, you should consider contacting an authorised intermediary firm to ask them what other options may be available to you that will also provide regulatory protection i.e. Financial Services Compensation Scheme and Financial Ombudsman Service.
Always seek independent legal advice to ensure you understand how these products work and what they mean for you if you are looking to sell your house.
Contact our Consumer Helpline on 0845 606 1234 if you are concerned about these products or other schemes making similar claims.
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