Negative Equity

TLaidler1991

Hi - need some advice.
14 years ago I purchased a property (flat) on 100% mortgage from a friend for £112k. No first time buyer schemes, so was a way to get on property ladder. My circumstances changed and when i looked to move the property value had dropped and I was now in negative equity. I reluctantly let this property out and after initially renting elsewhere I now own a house with about 85% mortgage on.  Someone suggested if i could rent the flat until retirement, this would become a pension fund.  Due to the neagtive equity, I am unable to change the mortgage rate on the flat so this is currently on a variable rate.  At the moment, there is a shortfall of £90 a month between flat mortgage repayment and rent income.  On top of that I pay the service charge which is another £80 a month along with insurance and repairs etc.  At the moment this flat is costing me about £210 a month.  With the next round of expected interest rate increases, this is possibly going to be £250.  On top of these, things will need to start being replaced in the flat ie boiler, fridge, washing machine. With all other price increases, our disposable income has drastically reduced.
At the moment, the outstanding mortgage is £92.5k, an estate agent has valued the property as £75k-£80k, possibly max £85k if sold with tennant.  Their sale fees are £1,800 + vat if sold, only lose about £100 for photos if doesnt sell.  So if I sell and get the £85k, then after fees, I'm probably looking at about a £10k shortfall to the mortgage lender.  A quick loan check suggest this could be repaid £175 a month over 6 years.  Other concern is if tenant moves out once listed, then i have 2 mortgages to pay, which i definitely couldnt afford.

If anyone could please offer advice on what I could do or what other options are available? Could I literally hand the keys to mortgage provider and walk away with a black mark on my credit file.

I've struggled to get in touch with mortgage provider to discuss what they could do.  But seriously doubt they will be willing to write off any of the amount owed.  About 10 years ago i spoke to them and completed a form showing my income and expenses, but there response was simply cut back on general basic things like food shopping.  After all the recent price increases, I have literally streamlined every possible expense i could.

I've probably spent about £17k towards this property so far, so hate the thought that it'll cost me about £30k and nothing to show for it.  Or continue paying the shortfall, end up costing me about £50k-£60k over the years but I'll have an £80k property to sell as a pension.

sancahojo

Have you tried to speak to our bank rather than a mortgage provider? How long until you retire and how many bedrooms does the flat have? Why do you think it would cost you £50-£60k over the years? And why do you think it will still only be valued at £80k when you retire?

ACG

Not really advice but what do you think will happen to the property value going forward? A few things to consider...
Negatives:
Property becomes dated and needs money spending on it,
The lease reduces and could start to affect property value,
Landlords will probably be selling up over the next year or 2 - this could affect the value of your property,
Rates rising

Positives:
I assume the mortgage is a repayment mortgage so balance is reducing.
You have a tenant paying the rent. 
If landlords do sell up, this could put more demand on the properties that remain meaning rent goes up. 

TLaidler1991

What would I ask the bank?  A mortgage advisor said there isnt any proucts available due to the negative equity, so nothing he could do.
I have about 25 years until retirement and its a 1 Bedroom Apartment.
That cost was based on about £200 a month for the next 20 - 25 years. At this rate it'll probably be more.
Just based on current value.  Who knows what the market will be in 20-25 years.  Price could fall further or might increase.  Seriously doubt it'll get back to what it was worth when i bought it.

jj_43

The valuation with tenants (higher) is very unusual, that is why most Landlords sell vacant. In either case your in negative equity. The reality is that you are trapped in the mortgage arrangements and the situation is only going to get worse, which you can foresee. It’s great your taking action. Sure if you have no other assets bankruptcy is an option. Your view that this property become your pension (well it has not worked out so far) is not realistic.

First, increase the rent if you can, treat your BTL as a business, can you reduce costs (self manage?). Are you paying tax on the income? Can you get a higher paying job? 

TLaidler1991

I joint own the family home and car. The aim of doing this is so our house isnt affected, so bankruptcy is the last resort.
Im already running the property at as much reduced costs as possible, but mortgage and service charge are the killer.
Plus as mentioned, money will need to be spent on the upkeep of the property.
Think i need to accept that as a pension is unrealistic.  I cant keep the property for much longer, so its looking at the best way to get rid so i dont lose out so much

sancahojo

TLaidler1991 said:

What would I ask the bank?  A mortgage advisor said there isnt any proucts available due to the negative equity, so nothing he could do.
I have about 25 years until retirement and its a 1 Bedroom Apartment.
That cost was based on about £200 a month for the next 20 - 25 years. At this rate it'll probably be more.
Just based on current value.  Who knows what the market will be in 20-25 years.  Price could fall further or might increase.  Seriously doubt it'll get back to what it was worth when i bought it.

There may not be products but you could list out your income and expenses to the bank and they could potentially come up with a solution (i.e. mortgage over longer term so reduced payments etc). I would think they would extend the term up to your retirement date which would add on an extra ten years that you would pay over. This would decrease your monthly mortgage payment drastically.

Could you not increase the rent you are asking for it? As you say, 25 years is a long time. I would be very surprised if your property would not increase in value over this period.

I suppose you just have to speak to the bank, see what they offer and then do the math on what is the best solution. As you say, it does seem a shame to sell and then still have a loan to pay off. If it were me and would try and reduce my mortgage payment and increase the money I am getting from the tenant and keep the property - but I don't know all the details of your finances.

TLaidler1991

I'll speak to bank to see what solution they might suggest.  I had thought of whether i could pay the interest only and then if thats £400 a month, i could make £100 a month over payment to gradually bring the balance down.  But the mortgage advisor i spoke to said they wouldnt do that because of the negative equity.
Unfortunately I have a Rental agreement until May so cant increase the rent.  I had agreed the rent in Mar 22, but the increase wasnt enough to cover the sharp increase in mortgage.
Plus if i keep, as previously mentioned, there will be additional costs for the upkeep which i wouldnt be able to afford.  So I'd end up with a run down flat which will be harder to sell.

A few years ago when I was last looking for a tenant, someone approached me with an offer where he would buy the property in 10 years time for the market value back then.  He would take over the property and pay me rent until then.  I would just need to pay mortgage.  But everyone advise it was too dodgy.  I'd pay mortgage but no control over property and what if they back out of the sale.
Does anyone know if there are people looking to buy under special arrangements which could be more favourable?