Negative equity converted to a loan

MapleRiggio

Hi, I'm new to MSE but was hoping for some advice/guidance. A number of years ago, I split from my wife and subsequently divorced. We owned a home together with first and second charge mortgages secured against the property. The timing was poor and the combined debt was around £30k above the sales value of the house, so negative equity. The first charge naturally was paid off but the balance only partially paid off the 2nd charge (£30k shortfall). As I didn't have balance to pay off directly the lender told me it would be converted to an interest free loan and be assessed every year on affordability until it was cleared. My ex wife and I have been paying this off over a number of years at the rate of £100 per month. This of course will take some time to clear.
However, I need to check that the lender actually has a claim on the outstanding. I have read that a second charge lender has a higher risk of losing out on getting their money back should a debtor default, hence the higher interest rate. Does anyone have any experience or knowledge of this as information on line is a little thin at best.

DE_612183

I'm guessing you could default, but would that not then mean that your credit history is screwed?

MyRealNameToo

MapleRiggio said:

Hi, I'm new to MSE but was hoping for some advice/guidance. A number of years ago, I split from my wife and subsequently divorced. We owned a home together with first and second charge mortgages secured against the property. The timing was poor and the combined debt was around £30k above the sales value of the house, so negative equity. The first charge naturally was paid off but the balance only partially paid off the 2nd charge (£30k shortfall). As I didn't have balance to pay off directly the lender told me it would be converted to an interest free loan and be assessed every year on affordability until it was cleared. My ex wife and I have been paying this off over a number of years at the rate of £100 per month. This of course will take some time to clear.
However, I need to check that the lender actually has a claim on the outstanding. I have read that a second charge lender has a higher risk of losing out on getting their money back should a debtor default, hence the higher interest rate. Does anyone have any experience or knowledge of this as information on line is a little thin at best.

That risk already materialised for them, you sold the property and couldn't afford to pay off the debt. They originally had an interest incurring loan secured against a property and now they have no security and are receiving no interest so technically are losing money thanks to inflation. 

sourcrates

Its known as a mortgage shortfall debt, most lenders have lots of trouble trying to get their money back on these types of debts, as they tend to be quite substantial amounts of money, that the average person won`t ever be able to pay back.

£100 a month on a 30k debt, won`t be paid off in an average lifetime, so they tend to be defaulted on quite a lot.

Basically if you can`t afford to pay this, and you can show them a budget that backs that up, there is precious little they can do in such situations, as legal action has already been taken on the debt previously, and you can`t be taken to court for the same debt twice, you can simply walk away from it.

Chances are the debt will be more than 6 years old by now, or very soon will be, so as credit debts are only reported to the CRA`s for 6 years, your credit file should not be affected by any actions you take now.