Stuck in joint mortgage with friend...

E

Ezdezat

Registered User
Messages
30
Hi All,

Hoping for some advice.

I bought a house in 2008 with a friend, and for obvious reasons (negative equity!) it's turning into a bit of a mess. Some background info;

Value of property - 120k
Mortgage - 240k over 35 years, variable rate with KBC, repayments 1250 per month approx

We lived in the house until about 6 months ago, we always envisaged we would live there for 4-5 years then either rent it out or sell up. We are both now renting separately with our respective girlfriends. The property is rented out at €850 per month (shortfall of €400). At the time of buying we earned similar salaries with similar prospects, and neither of us could afford a mortgage individually.

I now earn 50k PA + an 8k car allowance, I owe approx 30k on a personal loan & credit card, have 4k savings. I'm with my employer 9 yrs & prospects are good, my salary is likely to go up over the coming years, i intend to clear my debts over the next 3 yrs or so and build up some savings. I'm 33.

My friend earns 24k and is in temporary employment. Owes about 10k to the credit union and no savings. He's 34.

To cut a long story short - my friend is now refusing to contribute to the mortgage, saying he just can't afford it. We are now only paying the rental income off the mortgage, and it is in arrears. The bank have been reasonably understanding and we have been communicating with them, but the situation is obviously not sustainable. I don't want to contribute now to the mortgage, as half of anything I would pay would be reducing his negative equity also.

Any options I can come up with aren't attractive;
1) The bank agree to take his name off the mortgage and he signs the house over to me - I would be taking on his negative equity.
2) We agree with the bank to sell - we are jointly liable for the negative equity which he likely can't afford to pay, therefore I would end up paying more.
3) I pay an additional €400 per month to meet the repayments - he reaps half of the benefit.
4) We both continue to refuse to pay anything past the rental income - potentially end in repossession, and we will owe more than in option 2, due to legal costs & arrears etc.

Are there any options here I'm missing? Would the bank consider unusual solutions in these circumstances, such as parking his half of the mortgage?
Allowing us to sell up and split the negative equity 50:50? I doubt it, as likely I'm a safer bet to pursue for the joint negative equity.

I feel a bit like the harder I work to increase my income - it just exposes me more to the negative equity now tied up in the property. Obviously my gf and I are thinking of the future - eventually buying a family home etc., but I can't see an easy solution to this one. Just to note she would have no desire to buy into his negative portion of the property, understandably. I have been considering going with option 4, and rather than paying the bank, paying my contribution into a savings account which I could use if it got to that stage. I guess there are many pitfalls to this.

I should also mention that the property is in a Dublin commuter town, and I have no desire to move back into it. It was in a new development which didn't
turn out as idyllic as was promised, my gf hates the area, and we would be increasing our fuel costs drastically by moving back.

Any input much appreciated.
 
Sticky situation. Just to be aware, are you paying tax on the rental income and have you registered with the PRTB? This news may cause some pain now but much less than in the future.
 
burmo said:
Sticky situation. Just to be aware, are you paying tax on the rental income and have you registered with the PRTB? This news may cause some pain now but much less than in the future.
Click to expand...

Hi - yes registered with the PRTB and we cancelled the TRS. Not paying tax on the rental income but as I understand it we will both have to complete a tax return for the rental income in 2013, and as the income is less than the interest on the mortgage we should not be liable for tax.
 
Ezdezat said:
Hi - yes registered with the PRTB and we cancelled the TRS. Not paying tax on the rental income but as I understand it we will both have to complete a tax return for the rental income in 2013, and as the income is less than the interest on the mortgage we should not be liable for tax.
Click to expand...

Only 75% of the mortgage interest is deductible in computing rental profits.
 
Clarkey said:
Only 75% of the mortgage interest is deductible in computing rental profits.
Click to expand...

Tks for the info. Have been keeping receipts also for work done on the property, ie spent €600 having the boiler repaired recently. Even at 75% we should be safe enough I'd say.
 
Lots of ways of looking at this one.

You list the downside of Option 1 as you getting burdened with your friend's share of the negative equity, but realistically that's going to happen in all 4 Options.

No, there's no way to get a bank to chase 2 people for negative equity 50/50. They will chase whoever has more money - in this case you.

So if you continue as you are eventually the bank will repossess. Then the house will be sold by the bank (possibly at below market value if they're looking for a quick sale) and whatever the outstanding loan is, you will be pursued for. Because your friend has a job, albeit a temporary one, he may be chased for some but based on the figures you've shown, the bank will probably chase you for the lion's share.

So if you are going to let the house be sold anyway, and are going to get caught for the negative eq anyway, then wouldn't it be better to pick Option 2 over Option 4? With Option 2 you control the sale of the house, and make sure it gets the highest price possible thereby reducing the amount you will have to pay off afterwards.

Another way of looking at the whole thing is that if you take as a given that you are going to be paying off the lion's share of this negative equity in any case, then why not go for Option 1 at least then you'll have a house to show for at the end of it. With the other options you have to pay the neg eq anyway and have nothing to show for it at the end.

I wouldn't bother keeping savings if I was you, unless you can do it in such a way that KBC can't find out about it :) Maybe your gf could save for you.
Maybe you'd be better off putting that 4k against your credit card loans, considering KBC will swipe it for the negative equity anyway.
 
There is no nice outcome to this if he continues to earn very little and refuse to pay. The options you have listed are basically it. The person with the bigger income always has way more to lose. You can forget about getting another mortgage in the next ten years unless your financial situation drastically improves to take a huge negative equity hit.

I would sit it out for a while and see if your friends earnings improve. That is your only hope to come out of this with your share of negative equity. You have a vested interest in his earnings now so maybe you could help him out with work contacts or job hunting.

But again, he was very little to lose and you don't hold too many cards.
 
Forget about option 4 that's a no go for you.

Based on what's you've posted I'd go for option 1 if the bank agrees. Otherwise Option 2.

Only point to 3 is to prevent option 4.

You're going to have to do some tough negotation with the bank, maybe you'll have to threaten not to repay if they don't let you do option 1. But start off nicely with them.

You could do a side negotiation with your friend that he pays you say 100 Euro a month for say 5 years, pick an amount he can realistically afford, to give you some kind of contribution on the NE, and somethign that he could live with in order to get out of the mortgage. If he's any way honourable he should go for it.

No way should your GF get involved in this mess - bank would love her to no doubt. Probably might be best to say you are single.
 
Thanks all for the input.
There seems to be a consensus that Option 1 isn't such a bad option. I fail to see this and at this point will not even consider it, unless I'm forced into it. I would be saddled with another half of a house i don't want, and a massive lump of negative equity, while the other party would walk away scott free? Surely this doesn't make sense.

I have a closeout date of Sept in my head for a couple of reasons to try to come up with a way forward. One is that the mortgage changes to a (hopefully lower) variable rate in Sept. The bank, although they haven't agreed, seem to be reasonably understanding that they will only get the rental income until that point, while we work toward a solution. I am aware that i may need to bury my savings, either by paying them off my debts or putting them in my gfs name, if it gets messy.

I have made a proposal this morning, that we agree to pay the shortfall proportionate to our take home pay. That would put me paying approx 2/3rds and him 1/3rd. I may be willing to pay more than that, but a condition would be that we have a solicitors agreement drawn up to say that whomever pays a greater share of the mortgage, takes a greater share of the equity, at the end. Hoping there is some equity of course...

So we'll see what happens.

Do people think this is a reasonable offer? I should point out that as friends, we agreed from the start everything would be 50:50. Understand the definition of 'joint' is different from a legal standpoint, but in my eyes anything less is unfair.

I am really vehemently against options 1, 2, 3 and 4 and genuinely think my proposal is best for both of us in the long term. However if we can't come to agreement, I think I would allow the threat of option 4 to loom for a while to try force a solution, before my hand being forced into 1, 2 or 3, obviously seeking legal counsel during the process.
 
Here's option 5, Ask the bank to consider a split mortgage.

Split the mortgage in half. You make full payments on your half (including half the rent)

He pays just half the rent towards his part and the remainder is warehoused until his situation improves, which it probably will in time.

You guys are young. You have plenty of time to recover this situation and the bank is unlikely to want to crystallize the loss at this stage due to the high negative equity.

Do a side deal between yourselves (legal agreement) to agree how the asset or liability will be divvied up when the house is eventually sold

The monthly repayment is 1250 at present

Under the new arrangement
You pay 625 in total each month
He pays 425 from his "rental income"
Total 1050.

That leaves a shortfall to the bank of 200 per month which should be parked

I think the bank will run with this if you negotiate correctly.
 
Dr.Debt said:
Here's option 5, Ask the bank to consider a split mortgage.

Split the mortgage in half. You make full payments on your half (including half the rent)

He pays just half the rent towards his part and the remainder is warehoused until his situation improves, which it probably will in time.

You guys are young. You have plenty of time to recover this situation and the bank is unlikely to want to crystallize the loss at this stage due to the high negative equity.

Do a side deal between yourselves (legal agreement) to agree how the asset or liability will be divvied up when the house is eventually sold

The monthly repayment is 1250 at present

Under the new arrangement
You pay 625 in total each month
He pays 425 from his "rental income"
Total 1050.

That leaves a shortfall to the bank of 200 per month which should be parked

I think the bank will run with this if you negotiate correctly.
Click to expand...

Thanks for this. This is the kind of solution he was hoping for. He is of the opinion that if we continue to play hardball with the bank, we can push them into offering some kind of solution like this, and this is the main reason why he is refusing to contribute. As part of the proposal i've put to him, i've stated that i'm open to similar alternate options if he can come up with any.

I was of the opinion though that because we are both employed, and from the banks perspective can jointly afford to pay the mortgage, they wouldn't even entertain something like this? That there had to be exceptional circumstances?
Has anyone in similar circumstances achieved such a deal with banks? Is it better to have someone negotiate with the banks on our behalf for such a deal? (i had contacted 'New Beginnings' although have not met them).
Any info on this appreciated.
 
The bank will certainly negotiate with you especially if they get any hint that you may be considering the bankruptcy option. In this case the bank has a huge amount to lose in bankruptcy. They will lost the full negative equity portion plus the very onerous bankruptcy fees.

In the proposal, I put forward to you, the interest is being paid in full and you are still making a contribution to the capital. The shortfall is a mere 200 per month and your outlook is quite good. You do need to play your cards right. If the bank gets any sense that you are willing to pay the full amount on your own, they will suck it out of you.

Write them a letter, Spell out your proposal clearly and then adjust your monthly repayment to reflect this. Trust me when I tell you that the proposal is reasonable. After that, let the bank do all the running. Don't blink, Don't flinch.
I don't believe they will push it much further. In the proposal you need to stress your individual financial positions (that you are continuing to pay half and your friend will pay his half in full as soon as his situation improves)

Best of luck
 
Ezdezat said:
There seems to be a consensus that Option 1 isn't such a bad option. I fail to see this and at this point will not even consider it,


. The bank, although they haven't agreed, seem to be reasonably understanding that they will only get the rental income until that point, while we work toward a solution.

I am aware that i may need to bury my savings, either by paying them off my debts or putting them in my gfs name, if it gets messy.

I should point out that as friends, we agreed from the start everything would be 50:50.
Click to expand...

Life's not fair, when you go into a business transaction with a friend this is what can happen. It's not his fault he cannot afford the mortgage, neither is it yours that you can. The 50:50 deal is no longer on the table for you, unless your friend gets a well paying job.

Don't assume that mortgate rates are going down, all Irish banks are extending their margin to make up for past and yet to be booked losses that are coming down the track very soon.

You are now implying that you're going to make the situation even messier, by hiding money and all sorts.

Are you not paying the full mortgage currently - you mentioned only paying the rent to the bank. Are you PRTB registered?

I see no reason why any bank would go for Dr. Debt's option 5.

Where is everybody living? And what are the rents?
 
@ Dr. Debt: This is a most interesting option and certainly worth pursuing. As a matter of interest have you had experience in this area, as I wouldn't have thought the bank would consider this. Would it not be wiser to just continue to pay the rental income during the negotiation, and not increase the payments €1050 until, or if, they agreed?

@ Bronte: I understand life is sometimes not fair. I am trying to be understanding of my friends situation, and i do sympathise. However, at the moment I'm really not that much better off financially. Yes i get a car allowance but this gets spent on my car, as I put up a lot of work mileage. I pay more tax, I have almost €1000 going out each month against my debts. All told I don't have much more left at the end of the month than he does.
I do appreciate however that in the long term my prospects are better - my debts will be paid eventually, I have a reasonably good career.

Yes we are registered with the PRTB, but no we are not covering the full mortgage, only the €850. Just to note we met the bank to explain the situation earlier this year, and we opened a case to reduce the repayments to €850 for a limited time. Their representative at the time advised us to pay the €850 by debit card for the time being, and to cancel the DD. They took 3 months to review the case and only rejected it in late April. They called last month and this month for an update and I've advised them that we're working on trying to find a resolution.

My rent at the min is 950, split with my gf so 475 for me.
His rent is 850, split with his gf so 425.
 
Bronte said:
You are now implying that you're going to make the situation even messier, by hiding money and all sorts.
Click to expand...

I should mention also that i am not intentionally trying to make the situation messier. I am willing to pay my fair share, but my expectation would be that the other party should pay what he can reasonably afford. If i have to hide savings so that i don't lose everything into negative equity, then so be it.
My gf and I are intending to get married and start a family in the forseeable future, I can't afford to pump more than my fair share into a bad investment. If my fair share turns out to be 65:35 due to my higher earnings, i can accept that, but not 100%.
 
OP, The 1st thing you must do when considering this type of situation is understand the relative strengths and weaknesses of both the Debtor and the Creditor.

What does the bank want ?- It wants you to pay in full every month for the remaining life of the loan. If this happens they will get all their money back and earn interest from you for 35 years.

What does the bank not want ?- The bank will not want to crystallize a loss on this mortgage. If you surrender the property to the bank voluntarily or you go bankrupt
the bank stands to lose between 120,000 and 160,000 possibly more. It is in their interest to keep this mortgage functioning for as long as possible. Remember this. Its very important.

Now, If I was your Advisor, I would write to the bank on your behalf. I would spell out the respective and different financial positions of you and your friend and emphasize that one of you is no longer in a position to meet the monthly payments. I would then explain to the bank that I am advising you in relation to your options including voluntary surrender, the new personal insolvency act and bankruptcy. You then go on to suggest that the ideal solution for your clients would be to pay a reduced monthly payment each month of 1020, for a five year period with a proviso that the arrangement will be revisited earlier if your friends financial position improves in the meantime. You ask the bank to consider this proposal and if not acceptable you will consider some of the other options available.

All of this lets the bank know how you are thinking and quite frankly it would be absolutely foolish of the bank not to accept it. They may impose one or two conditions of their own and that's to be expected.

Now my question to you. Why do you think the bank will not go for it ? What can they do ? Repossess the house ? ( the bank certainly does not want that) Push you into bankruptcy ( it doesn't want that either). The interest is being paid in full and you are paying off a small bit off the capital each month. The reduced payment is only 200 euro per month less. Ive been dealing with banks all my life at a senior level. They are not stupid, they understand risks and any decisions that they take will be carefully weighed up.
 
Surely if he is paying out that much in rent he should be the one that moves back into the house?
 
One thing I forgot to mention.

You also need to consider your credit rating especially if you intend to apply for a mortgage again in the future. Such a propsal is likely to affect your credit rating for a number of years so you also need to consider that. Given that you are carrying such a large burden of negative equity, your chances of getting a separate new mortgage are slim enough anyway so this may not be too relevant.

Nonetheless, Putting a dent on your credit rating for the sake of 200 per month is something you must give some thought to.
 
@ Dr. Debt.
Tks for this info it is very helpful.
I would have expected the bank not to go for it, as in my experience banks and similar institutions have very closed parameters, I have not been able to find any cases where they allowed such arrangements, where both parties were in employment etc. From my research - if the bank feel you can jointly afford the mortgage, they expect it to be paid, end of. Although maybe they are becoming more flexible here.

I would like to preserve my credit rating, but it's not top priority. If I'm financially better off by losing it, then so be it. Due to the negative equity I'm unlikely to get another mortgage anytime soon anyway. I can save for anything else and i have credit card / credit union for emergencies.

Two last questions if you don't mind;
1) I have struggled to find who best to talk to in these matters - solicitors / accountants / financial advisors? Who is best? FA's seem to be more about advising you on what insurance to buy. What type of advisor should I be looking for? Or do i need one at all?
2) Is the proposition in your 2nd post not different to that of your 1st? In your 1st you proposed a split mortgage, in the 2nd you were proposing a reduced payment for 5 years. Is this the same thing?

@ TableEnd
He is paying 425 rent but we receive 850 rental income (425 each) anyway, so it would be of no benefit for him to move back in.
 
@EZDEZAT

The proposal is the same. Its basically a split mortgage. A portion of the mortgage is being deferred until a further date.

I don't think you can say that a Solicitor or Accountant or Financial Advisor is the right category of person to employ. You need a good negotiator and someone who understands banking inside and out.

And by the way, of course the bank's opening line will be "No, it cant be done" but that's what negotiation is all about. You both start from an extreme position and come together through agreement.

The big mistake that I see all the time is that Debtors are too quick to accept the bank's position. The bank is only looking after its own interests. Its up to you to protect yourself from anything that is unfair or unreasonable. In days gone by, there was a general feeling that the bank was on your side and there to help you. Those days are long gone. The bank is working in its own interests ALWAYS.
 
You must log in or register to reply here.
Back
Top