House in negative equity, what to do with it??!

Ezdezat

Hi All,

Would like some thoughts on the following, if you don't mind :rolleyes:

I co-own a 3 bed terraced house with a friend of mine, we bought just before the collapse. We were both single at the time, were burning through our savings renting (and partying ), and decided to buy a property, which we would live in with a 3rd friend of ours (he rents a room). Idea was that after 5 yrs or so we could sell and both be left with at least our initial investment plus hopefully a bit more.

Now, 4 yrs later, we're all looking to move on, possibly rent the place out, and rent other properties with gf's etc. We're in approx 100k of negative equity, and the rental market where we bought is not fantastic. To get it rented out, we'd have to put minimum a couple of grand into the house, as only top spec properties in the area are likely to remain occupied. Even at that we'd be left with a shortfall on the mortgage, and face the risk & costs of tenants moving out, etc.

I'm in a position that although i haven't got much in the way of savings, I'm on a decent salary and in permanent employment in a relatively stable industry. My friend & co-owner was working in construction during the boom and is now struggling in a minimum wage temp job, so making up any shortfall in the mortgage and other expenses associated with renting the place out, is going to be difficult for him.

I'm thinking of offering to take the mortgage on, moving my girlfriend in (who's also earning, and able to contribute towards the mortgage), and let him walk away scott free. The obvious advantage to this is that i can turn it into a home, as opposed to the bachelor pad & 'investment' property that it is now.

I suppose the questions are;
1) Would i be off my rocker???
2) Legally what would have to be done?? I assume get a solicitor to have the deeds signed over to my name?
3) In the event that when we advise the bank, i don't meet the stress test, what do i need to do to ensure he has no claim on the house if we need to leave his name on the mortgage for a couple of years, until such time that I can meet the stress test?
4) In the same scenario as point 3, what is he going to need, to ensure the bank don't come after him in the event that i can't pay the mortgage, due to illness, loss of employment?
5) Any ideas what sort of legal fees we would be looking at to have an agreement drawn up by a solicitor?

I should point out that this is all perfectly amicable, but I think it would be in both our interests to have an agreement drawn up!!

All comments welcome, thanks

chris85

Firstly I do think you would be a bit mad taking on the property yourself when ultimately it is an investment purchase at this point and you will want to get rid of it soon. You will be leaving negative equity just for yourself and thats tough when you sell.

You will be taking all the responsibility for the negative equity.

In order to get your friend off the deeds and mortgage you will need to be assessed for a mortgage in your own right. Bear in mind if on a tracker you will likely lose this getting a new mortgage agreement. Also unlikely the bank will want this to happen as they will have one less person liable for the debt.

If you cant get mortgage on your own there is no way the deeds would be in your name only. Look at it from his point of view, he would be liable for the mortgage and have no claim to the property. Nothing can be done to ensure the bank dont chase him if default occurs and his name is still on the property.

Ezdezat

Hi Chris,

Thanks for the reply. Just to note, it is an investment property at present, however if i was to take on the mortgage, the idea would be to live in the house and make it my home for the forseeable future. I would likely live in it until the value of the property exceeded that of the mortgage.

I did consider your points re the mortgage. We're not on a tracker so that's not an issue. At present my salary is sufficient that i should qualify for a mortgage is my own right, but i have some loans / HP agreements that likely mean i won't pass the stress test right now, unless they took into account the fact my gf would be contributing.

I suppose if we agreed to go ahead with this but had to keep both names on the mortgage;
The concern is for me, is that if i put money into the house maintaining it, paying the full mortgage, and improving it, for a number of years I would want the security of knowing he has no right to it.
The concern for him is that if i got into financial difficulty, he wouldn't want to be liable, and be assured that i would take out a mortgage in my own right when i was financially in a position to do so.

I was thinking we may be able to get a solicitor to draw up some kind of civil legal agreement detailing all of these scenarios, and how we would deal with them if they arose?

killers1

Ezdezat wrote: »

Hi All,



I suppose the questions are;
1) Would i be off my rocker???
Absolutely stone bonkers mad!! You may as well be giving your friend a suitcase with €50k cash in it to allow him to walk away from his share of the negative equity..
2) Legally what would have to be done?? I assume get a solicitor to have the deeds signed over to my name?
You will need the approval of the bank. A new mortgage will have to be taken out which the bank will have no appetite for due to the negative equity so no chance of getting approval to have someone removed from the mortgage as they would have 1 less person to chase for the debt (as Chris said)
3) In the event that when we advise the bank, i don't meet the stress test, what do i need to do to ensure he has no claim on the house if we need to leave his name on the mortgage for a couple of years, until such time that I can meet the stress test?
Irrespective of meeting the banks income guidelines and stress testing you are looking for 100%+ ltv which isn't an option....
4) In the same scenario as point 3, what is he going to need, to ensure the bank don't come after him in the event that i can't pay the mortgage, due to illness, loss of employment?
If your girlfriend moves in and you both repay the mortgage and then in 20 yrs time you sell the property your friend is legally entitled to 50% of the sale proceeds. There is no way of protecting yourself from this situation as long as he is on the deeds..LIkewise there is no way of him escaping his liability as long as he is party to the mortgage.
5) Any ideas what sort of legal fees we would be looking at to have an agreement drawn up by a solicitor?
I would be very wary of these types of agreements and it would need to be watertight... the suitcase of €50k cash still springs to mind and I think you'd be mad...

Your best bet is to try to rent the property out and go and rent with your girlfriend... or talk to the bank to see if you can get a reduced repayment for a period while your friend finds a better paid job...or let him rent out his room to someone else to cover his portion of the mortgage...

Ezdezat

Hmmm not great news :eek:
The way i looked at the suitcase of cash is that we both invested 15k in at the start, he's losing that plus whatever has been paid off the mortgage since, even though that money is essentially gone now. As long as i stay in the house and pay off the mortgage until house prices level off then the 50k is relative. Also - the reason i bought with him in the 1st place is because i fell short of getting a mortgage at the time, had i been able to afford it I would have the burden of the negative equity anyway, but would it really matter as long as i was staying in the home?

My issue with renting the place out is that I can't see any way for him to get a better paid job in the next 5 years, he's going to need to re-train etc. We already went to the bank and reduced to interest only. By reducing the mortgage payments we're just kicking the can down the road, and the value of the mortgage isn't going up, while property prices stay at rock bottom, so the situation has no way to be resolved in the near future.
Also in interim period I guess i will have to foot the bill to decorate the place, and the other associated costs of renting, as he just hasn't got it.

Damn recession