Mortgage brokers are urging home-owners and prospective buyers to avoid unregulated lease option schemes due to concerns the sector may target vulnerable consumers.
With lease option agreements, prospective buyers pay a sum, normally between 3 and 5 per cent of the property price, for an option to purchase the property in the future.
The buyer would usually take up tenancy of the home as part of the agreement in return for paying the mortgage. There are websites that pair up homeowners with prospective buyers.
Consumers need to be aware, however, that by dealing with unauthorised firms there are no regulatory protections in place and they cannot claim compensation from the Financial Services Compensation Scheme.
The FSA has reservations that some lease option schemes are akin to sale and rent back agreements, which are regulated products.
If the deal allows the homeowner to stay in their property and make regular payments to the prospective buyer, which is how some deals are structured, then it is likely to be an SRB agreement and the firm or individual selling the property must be authorised.
At the FSA’s annual public meeting last week, Financial Conduct Authority chief executive designate Martin Wheatley said the regulator thinks there are “serious problems” in the sector, as some deals are set up like SRB agreements.
In September, the FSA extended the regulation of SRB to cover all transactions, including those between family members.
In February, the regulator temporarily closed the sector after it published a report showing most SRB transactions were unaffordable or unsuitable and should never have been sold. Following the publication of the report, the FSA referred one firm to its enforcement division, while other firms stopped taking on business or cancelled their permissions.
Some brokers believe products that allow home-owners to stay in their property if they sell it for a reduced rate, or in exchange for a fee, are particularly dangerous for vulnerable consumers, who might look to them in desperation.
SPF Private Clients managing director Mark Harris has called for the FSA to regulate these products. He says: “These things have got to be regulated. They are scandalous and prey on vulnerable people who will make emotional decisions that have not been thought out.
“The only thing to do if you are in difficulty is to go and visit Citizens Advice and your lender to work something out. Using these schemes is dangerous and should be avoided.”
Your Mortgage Decisions director Dominik Lipnicki says: “There is a lot of social stigma in losing your home so some people will be attracted to schemes like this to pretend to everyone that things are fine.
“This has to be regulated as it is another scandal waiting to happen. Any financial product that targets people who are vulnerable can attract the wrong type of people into the sector.”
Coreco director Andrew Montlake says even traditional lease option schemes can put home-owners at risk of being lumbered with arrears or significant debts if the buyer fails to keep up with the mortgage repayments.
He says: “Anyone entering into this needs to understand the risks involved and make sure their mortgage lender is entirely aware of the situation and happy about it.”
However, some feel lease options provide a valuable alternative to traditional homebuying if the transaction is carried out in a responsible way.
John Charcol senior technical manager Ray Boulger says: “If they are done properly, lease options can serve a decent purpose. If you find the property you want but are not yet in a position to buy and you think you can buy in a couple of years’ time, the lease option gives you the right to buy your property at a pre-agreed price when you are ready.”
Boulger says if the FSA regulated the products out of existence, which has virtually happened in the SRB sector, it would take away another option for people looking to get on to the housing ladder.
He says: “It would be a shame if the concept was banned because there are situations where this concept can be useful and it would deny some people an option which makes sense for them.
“Plus, if you regulate that market it would bump up costs because of regulatory fees and you might find some players leave the market, so competition would lessen.”
However, Boulger says the sellers, or firms acting on their behalf, must ensure the contract agreement does not allow for any of the parties involved to be put at risk.
He says: “The key point is to make sure the terms of the contract make it clear there are no fees if the person decides not to exercise the option to buy and to ensure the rent is reasonable in exchange for the option to buy. Firms must also ensure the vendor does sell the property to the buyer.”