Flat repossesion consequences for my own home

tom84

Can anyone give me some advice please. I have 2 houses, one is my own home and the other is a flat I bought for investment. I’m trying to plan ahead for the future as I am worried that potentially the flat could get repossessed if I struggle to meet mortgage payments due to interest rates rising substantially in the future. I think it’s best to know the potential consequences early on.

My home which I bought in 2011 is worth £145k with a £90k mortgage outstanding, hence £55k positive equity. I put down a £55k deposit when I bought the property last year. The present value of home is around £145k, the same as I paid for it. I have no problem meeting mortgage payments on my home.

The flat was bought in 2007 and has taken a serious crash in the property market, I completely regret buying it but it’s my own decision and I have no one to blame, but think its best I actually have a plan of action in case the worst was to happen. I bought it for £125k in 2007, and it is now worth around £90k. The mortgage outstanding is £110k, hence negative equity of £20k.

Currently the mortgage on the flat is rolling along as the fixed period has ended, but the rate is linked to the BOE base rate, hence if rates were to rise which they must in the future then my payments would also rise. I also know I would not have a chance of remortgaging anywhere else as they would say the outstanding amount of the current mortgage is more than the flat is worth, I have no cash to make up the difference.

I am worried if the flat, which is £20k in negative equity was repossessed, how would that affect my own home. Both properties are with different mortgage companies. Would the mortgage company of the repossessed house try to get me to sell my own home to release equity and pay them the £20k? Is this possible?

I just want to hopefully hear that if the flat was repossessed that wouldn’t mean me and my family being turfed out of our home due to actions the repossession would cause. I’m also guessing if I was repossessed, this would affect my credit and would mean that I would not be able to remortgage my house when I come out of the fixed period in a few years?

Another question, would it be possible to gift my house to my wife if I knew the flat was going to be repossessed – obviously this would mean my wife would need to take a mortgage out as well?

Sorry for all the questions, any help or advice is truly appreciated so that I have an idea of how I can plan ahead. Just very stressed about all of this. Thankyou in advance.

DVardysShadow

In whose names are the flat and the house? If either of them are joint, are you Tenants in Common or Joint Tenants? What equity do you have in your house?

If the flat is in your name and the house is joint, the worst which can happen is that the lender for the flat can put a restriction on your house I think.

It would be foolish, I think to gift the house to your wife as this is precisely the kind of transaction which can be unwound if you go bankrupt - which the lender might feel it is worth doing for £20,000 if you have gifted away your equity.

I would say that the sane solution might probably be to sell the flat and secure the shortfall on your house - paying off the £20000 as a secured loan - as long as this reduces your outgoings.

zzzLazyDaisy

Worst case scenario: lender repossesses flat, sells it for less than you think it is worth (a forced sale is unlikely to achieve the same rice as a sake by owner). Lender will then look to you to pay off the difference, if you are unable to do this the lender will take you to court and obtain a charging order, which means that when you sell your house the debt will be paid before any money is paid to you. However, the lender is likely to want an agreement from you to repay the debt in the meantime and if you are unable or unwilling to do this, will more than likely go for bankruptcy proceedings, which will result in the forced sale of your home.

Do not think about transferring ownership to your wife as this will be recorded on the title deeds at the land registry and will almost certainly result in bankruptcy proceedings against you, since this is the only way for the Lender to have the transfer reversed.

On the positive side, all the indications are that interest rates are unlikely to rise any time soon. So your best bet is to start saving hard, and put as much money away as you can to pay off the shortfall, so that if you do sell you can make up the difference. I am presuming that it is an interest only mortgage for tax relief purposes? Does the rent cover the interest on the mortgage? As long as you are covering your costs there is no need to panic, and time to plan for the future, but you need to accept that there is a shortfall and find a way to plan for paying this off... looking for ways to avoid paying it off is a waste of time and could get you into real trouble, financially.

Thrugelmir

Firstly don't panic. Base rate doesn't look like increasing in the short term. So you need to plan on how to clear the deficit.

Depending on whether letting the flat is profitable or not needs to be factored into the equation.

As I would suggest paying down either mortgage into order to build either equity (with which to release funds in the future) or reduce the negative equity.

You'll need to settle the shortfall so best to budget on how you pay it off.

tom84

Fantastic help from everyone, I appreciate your time in writing these posts and thankyou once again., in this day and age its rare for people to give any advice for free which is why these forums as such a fantastic resource.

DVardysShadow - Flat and house are both in my name. The house has approx 55k equity.

zzzLazyDaisy - on the flat it is an interest only mortgage and currently the rent is covering the interest only payments so I am currently ok making the monthly payments

I am a little relieved about knowing the possible situations I could find myself in. I will try to save every penny I have, hopefully I could possibly save 10k within the next year. Good news to hear interest rates are not going to rise for a while at least. Im guessing their are quite a few people in similar situations that are on rolling mortgages out of the fixed period and who cannot remortgage due to being in negative equity.

So if I knew I was in a position I could not keep up with repayments on the flat, there is no chance of gifting the house to my wife as the court would possibly look to reverse that.

But I guess I could possibly sell the house to my wife before any repossession of the flat took place ? Last thing I want to happen is being forced to sell/move out of our home, so possibly selling the house to my wife who would have to get a mortgage in her name is something I could look at ?

DVardysShadow

You have a net £35k equity then.and you can save £10k in a year at a pinch. I suggest you plan to say about £7k over the next year. Keep a good emergency fund and I suggest pay the rest off the mortgage on the flat - yes I know, you get tax relief on it - but if you put the money into your present home, you may have to sell that to get the equity out to resolve negative equity on the flat.

I don't see that you can easily sell the house to your wife in a fire sale situation - she would not have the equity to see the transaction through on straightforward terms. What it could be reasonable to do is to put the house into joint ownership now - rather than in a panic later, but leave the flat in your ownership. If things go wrong, you might get a restriction on the house to resolve negative equity on the flat - this would be preferable to a charging order which would be what you would get if the house is in your name alone.

Dave_Ham

Again, any movement on the property that is seen to protect the equity will not be looked upon well.

I think you are over-doing this. I would expect your goto product is probably a fair one and at interest only I would expect you to be doing better than breakeven?

They will not reposses your residential home on the back of money owed on the investment property. They will agree a repayment with you and probably a charging order is the worst they will do.

Further to your other question; a repossession and assumed missed payments will make a huge dent in the chances of you getting any sort of finance, not just a remortgage.

All the best

zzzLazyDaisy

If you sell the house to your wife, it would have to be at market value, otherwise if you default on the payments on the flat, the sale of the house will be at risk of being reversed by the courts. Does she earn enough to raise a mortgage in her sole name, to achieve this? A sale at full market value would release enough equity to allow you to pay off the shortfall on the flat and eliminate the negative equity.

But if you remortgage the house to raise the extra money needed, this will achieve the same effect.

It is fairly cheap and easy to put the house in the joint names of yourself and your wife, and would probably be less likely to be viewed adversely, since it is a matrimonial asset. That might protect half the equity should the worst happen, but of course that would depend on how long there is between the transfer into joint names and any subsequent default.

Really, though, the financial consequences of any default are likely to impact on your credit ratings for years to come and are best avoided if at all possible. You need to seriously focus on raising the funds to buy yourself out of this situation rather than hoping to avoid it altogether.

getmore4less

What rent are you getting on the flat?