Transferring of negative equity

athleticodan

Dear Forum members,
I am here to ask for support and advice. This is a real situation which I am involved in but to not cloud your judgement I will explain this situation as a neutral party.

In 2007, two people buy their first home - a mortgage of £132,500. Three months later, the house prices plummit and the house goes in to negative equity (price actually dropped to around £100,000). House recently valued at £115,000-£120,000 - and recommended to put on market for £119,500 but accept anything within £5,000 of this.

One of the home owners now wants to leave and move in with his girlfriend whereas the second one is prepared to take on the mortgage and move his girlfriend in (and put her on the mortgage in place of the outgoing person).

An INITIAL 'over the phone' conversation with the existing mortgage company has said the couple who want to take on the existing mortgage are financially ok to do so. The balance outstanding on the mortgage is £126,486.

The question is, with the house being in negative equity, does the person leaving owe the person staying half of the loss? This is going on the assumption that if it had made money half the equity would have probably be claimed by the person who would be outgoing.

This is not a divorce so pensions and other incomes are not up for consideration, this is a situation between two friends who want to do things the right way.

Thanks in advance for any tips or advice.

DannyboyMidlands

Yes assuming that everything was split 50:50 on the way in, it should be split 50:50 on the way out. Neg equity or profit.

Surely you guys talked about this stuff before you bought the place?

zzzLazyDaisy

The answer is 'yes' the person leaving owes the person staying half of the negative equity, but it isn't as simple as this.

If the person leaving simply refuses to pay over half the negative equity and refuses to make any more payments on the mortgage, the person staying will be faced with dealing with the situation as he is the one who wants to keep a roof over his head.

The one who has left has little incentive to pay up, as he has a place to stay and unless he wants to get another mortgage with his gf, he doesn't have a lot to lose leaving things as they are - unless the staying person defaults on the mortgage.

So it isn't as simple as going in with big boots and laying the law down (not saying that is your intention btw) and you may need to be prepared to do some negotiating.

On a separate note - as the incoming gf, I would not want to buy into a house that is already in negative equity, since if the relationship didn't work she would be potentially faced with a demand for half of the negative equity even though it already existed when she became a joint owner (I am assuming that the lender is willing to allow a transfer of equity, because a sale and purchase would mean that the staying person and gf would need to find the negative equity plus a deposit in order to buy the house).

franklee

It should be split as you agreed on the way in.

Your post misses out vital ingredients like how exactly was the property purchased? Was it as joint tenants or tenants in common. If tenants in common what percentage does each person own? Who put what in regarding deposit? Who paid what in therms of mortgage an bills during ownership?

The loss should be shared but how it should be shared depends on the above details.

If you each put the same deposit in and own the property 50/50 and paid the mortgage/bills 50/50 then I'd suggest any profit should be split 50/50 and thus it follows that any loss should be split 50/50. BUT it depends on what you agreed when you purchased.

Richard_Webster

Lender may well want debt brought down to their present maximum loan to value ratio before they will consider any a transfer.

Not much help now for OP, but really just for those reading this other than OP - please consider what can happen and how you can get yourselves into a hole that you cannot easily get out of.

Always consider the possibility or property going down in value and decide whether and how you would cope with it before buying together.

athleticodan

Yes everything has been split 50/50, no deposit was paid on this mortgage either.

I guess we have never spoken about what will happen in the future although, I certainly want to do things right and ensure the firendship continues.

LaisyDaizy, you make an excellent point about the girlfriend moving in to a house that is already in negative equity too - this is not a smart move for all concerned.

zzzLazyDaisy

Thanks to Franklee for the addtional comments - I had assumed that the property was origoinally purchased under a simple 'joint tenancy' arrangement since that is by far the most common way to buy a house in joint names. But you are right, if there was any other set-up such as a trust deed or buying as tenants in common, then the agreement made at the time of purchase will dictate how the trasnfer of equity is managed.

However, who paid what in terms of deposit (unless this was set out at the time of purchase), bills, mortgage etc are red herrings as they do not affect the legal ownership of the property or change the beneficial interest.

zzzLazyDaisy

athleticodan wrote: »

LaisyDaizy, you make an excellent point about the girlfriend moving in to a house that is already in negative equity too - this is not a smart move for all concerned.

TBH I don't see any problem with her moving in and sharing the cost of bills, food etc, what would concern me as the gf, is taking on liability for a mortgage on a property that isn't worth the amount of the loan that she is being asked to take responsibility for (bearing in mind that on a joint mortgage, each person is individually liable for payment of the whole debt).

In otherwords, you can still live together without her being on the house deeds/mortgage (unless, of course, you need her income to get the mutiples required by the lender).

athleticodan

I think the best option is to sell and both cover the difference should the person leaving not want to pay soem part for the loss incurred.

A solicitor has already offered to represent the person leaving, but then, coomonsense tells me a solicitor will, like a taxi on a rank waiting for customers, represent anyone.

athleticodan

We sat down and it was said that the girlfriend would be paying 25% and her boyfriend 75% towards mortgage and all bills. Food bills would be shared between them.

I am finding it difficult to keep writing these post as an neutral!!! ha ha.

zzzLazyDaisy

athleticodan wrote: »

I think the best option is to sell and both cover the difference should the person leaving not want to pay soem part for the loss incurred.

Sorry to be a gloom merchant, but you may still have a problem.

Of course the best answer may be to sell up and each person cover their share of the shortfall. BUT if one person fails/refuses to pay their share, or the full shortfall can't be covered for some reason, then the lender won't agree to the sale.