Homeowners considering selling their home and renting it back again are being given "woefully inadequate" advice, a consumer watchdog warns today.

Which? Money has reported two sale-and-rent-back firms to the Financial Services Authority (FSA) for acting without regulation, while it says the majority were failing to comply with new rules introduced by the City watchdog to protect consumers, folliwng its investigation.

The group says out of the 17 researchers who contacted nine firms, only two were offered acceptable advice (see the Mortgage Arrears guide).

Sale-and-rent-back enables homeowners to sell their property to a company and rent it back again.

It is usually a last resort for people who are struggling with debt but do not want to move.

However, the schemes have come in for heavy criticism after it was found that some companies paid less than 60% of the market value for properties while others levied steep rent increases and some evicted people after just 12 months.

The problems led to FSA rules being introduced to protect consumers, including that firms must offer assured shorthold tenancies of five years.

Investigation findings

Which? Money found:

  • out of the nine firms it contacted, two were not registered with the FSA to offer sale-and-rent-back. Despite this, they both gave quotes to researchers for one of their schemes.
  • Seven advisers failed to discuss whether sale-and-rent-back was the right option for a customer, with six of these going on to give a quote.
  • On only two occasions were other solutions fully explored, and on both of these the adviser suggested the customer consider these options before proceeding with sale-and-rent-back.
  • Only one firm did a thorough affordability check to see if sale-and-rent-back was suitable for the customer, with others asking basic questions about income and what might be affordable as rent, while some did not cover the issue at all.
  • One adviser gave the researcher a quote that would not have left them with enough money to clear their credit card debt, while another adviser tried to persuade them to sell their home and not rent it back without finding out how much debt they had.

Under the FSA rules, firms only need to do a proper affordability check if customers decide to proceed with a scheme, but Which? Money says it thought advisers needed to have a good idea of people's financial situation in order to offer a quote.

Peter Vicary-Smith, chief executive of Which?, says: "It's simply unacceptable that people are receiving shoddy advice about such a huge financial decision.

"Not only are regulated firms not doing enough to ensure vulnerable consumers make the right choices, some are offering sale-and-rent-back that aren't authorised to do so.

"The FSA must tighten the screw on these firms to make sure the rules are followed and consumers are protected."

Further reading/Key links

Valuation loophole: Free house price valuation
Cut home loan debt: The Remortgage Guide, Free Mortgage Guide
Latest house prices: Nationwide, Land Registry, Halifax