Negative Equity

Posted on 27 October 2011 by Babs


4-5 years ago my son took out a joint mortgage with a friend. The mortgage is interest only ( £155k) and there was also a joint unsecured loan of £30k. Both parties now want to leave the house as they have new partners and have not been able to come to an arrangment for one of them to stay in the house. They have been told by the mortgage company that , if the house is sold, the unsecured load could remain ( they cannot afford to pay it off) and that the interest rate on it would rise dramatically. They paid £155k for the property which is now probably worth no more than £145k. They would dearly both like to walk away from the mortgage and sell the house but would not be able to fund the shortfall. Not many options available to them, would your advice be to rent the house out? My son might stay if something could be agreed amicably but does not want to be held to ransom by the co-owner. Neither really knows what their rights are and can't see a way out of the mess. Thanks for your help

Babs

Your Son and his friend find themselves in a very difficult situation for which there is no easy answer.  Whether one of them decides to stay in the property or they decide to let it out they should both seek independent legal advice to make sure that they know what the rights and responsibilities are.

With regards to letting the property, they should get the Lender's consent to do this otherwise they could be in breach of their mortgage conditions.  In theory this could lead to the Lender taking possession, but is this likely whilst the property is worth less than the mortgage and they continue to meet the mortgage payments?  Whilst letting the property could allow them to go their separate ways the mortgage will remain outstanding and any Lender looking at a new residential mortgage application will want to be sure that the rental covers the mortgage payments by at least 125%.  If it does not then your Son will find that any borrowing will be reduced by the amount of the existing mortgage which may leave him with insufficient funds to purchase anything new.

Have you thought about whether you can help your Son by raising the shortfall yourself, either with help from his friend's parents or on your own?  This may enable them to sell the property and redeem both the mortgage and unsecured loan.  You would need to take legal advice about how to ensure you get repaid, as it may involve registering an interest on any new properties your Son and his friend purchase.

Peter

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