Negative Equity - What are my choices?

Posted on 27 January 2011 by Dan


I have a 110% ltv mortgage on a property which i purchased for £113,000 in November 2007.

I pay an interest only mortgage and currently rent this out to a friend.

The property has most probably dropped by 5-10% value leaving me in negative equity + an outstanding loan.

Later this year I hoped to buy a property with my girlfriend but this it seems is going to be a major problem. Is it recommended to contact the lender and try to get it changed to a but to let mortgage or would they not do this?  If so at what cost?

Dan,

I recommend that you do contact your Lender and ask whether or not they will give you their consent to let the property. It may be that they will want to charge an additional interest rate for this and also charge an administration fee. The rates and fees differ from Lender to Lender and you may even be able to keep your current rate.

If they will not agree to you letting the property then you should ask what schemes they have in place for helping borrowers in negative equity. They may be willing to let you sell it and carry forward any shortfall in the debt to your new property or they may accept a lower amount to repay the mortgage in full and write off any shortfall. If they prove to be inflexible you may be able to obtain an unsecured loan to repay any shortfall. An unsecured loan would be more expensive but your new property would not be at risk.

Even if you do get permission to let the mortgage may still prove to be a problem when it comes to getting a new mortgage. Lenders will look to any rent you receive covering at least 125% of the interest only mortgage payments on the property before they will ignore it. I suggest that you get 2 or 3 rental assessments from local agents so that you have an idea of whether or not you would be better of repaying the mortgage.

Depending how you get on at your Lender I would also recommend that you speak to your local Citizen's Advice Bureau.

Peter

Answers provided in response to Ask the experts are based on the information provided and do not constitute advice under the Financial Services & Markets Act. They reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.

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