# Selling BTL in negative equity?



## JanuaryJones (18 Dec 2014)

We have a family home and a BTL property, both in negative equity (c.40k and 80k respectively). Both are on tracker mortgages with AIB.
The BTL monthly mortage is 1580 and we are getting rent of 850. Realistically we could get rent of 1100 but the current social welfare tenants couldn't afford it and we'd be basically making them homeless.
At the moment we are paying both mortgages in full but it is killing us and at this stage it just feels like throwing good money after bad. But we're not a problem for the bank as we are fully up to date. 
Does anyone know is there a process for dealing with the shortfall of the sale of the BTL? Obviously we can't sell it without bank's permission. Has it happened that AIB have tacked on the shortfall to the family home mortgae or would it be a totally new loan on variable rates?


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## Brendan Burgess (18 Dec 2014)

If you have a cheap tracker on a buy to let property, it is a good investment and you should keep it.  If you give the figures, I can show you that. 

But you have something like 
Mortgage balance: €300k
Interest rate: 1%
Repayment: €1,580 

So you are paying €3,000 a year in interest. 
You are earning rent of €12,000 a year. 
So you are making a profit before tax and expenses of around €9,000 a year

Of your repayment of €1,580, only €250 is interest. So you are paying down the capital by €1,300 a month.  

Let's say the bank allows you to sell the property and keep the €80,000 shortfall as a a mortgage for the same term and the same rate. You will be paying €400 a month, but you will be getting absolutely nothing for it, other than reducing your net liability. (Of course, they may ask for a shorter term and at SVR, so you would be wiped out by that) 

If you continue as you are, you will have reduced the mortgage by €80,000 in 5 years and will be out of negative equity. 

*So what should you do? 
*Talk to the bank and ask for a restructure.  They will be slow to agree as you have such cheap trackers. But they might agree to extend the term which would take the cash-flow pressure off you.


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## JanuaryJones (18 Dec 2014)

Thanks Brendan. 
The BTL was our first home and when we traded up we retained it, thinking that it would be a pension of sorts.

Don't have the exact figures to hand but think that the BTL is on a 1.1% tracker with 23 years remaining. Balance is 290k. 
At the moment the figures are

Rent 850
Property tax 18.67
Insurance 35
Mortgage  1572
So it is costing us 776 per month and then we need to pay tax on the non interest part of the mortgage. So around 900 per month

I realise that if we sell at a shortfall then we are going to have to pay that back and have nothing to show for it. 
Just feel that we're caught between a rock and a hard place. That we're sacrificing our current standard of living for the future. Obviously we need to have some kind of pension but if we can't afford it then it is a luxury.

We budget well and the only things I can think of to reduce outgoings/increase incomings are
Increase rent on investment property
Look for a split mortgage on our home mortgage

My husband is in secure employment but I'm self employed and income can vary. 
What would restructuring look like? Would the increase the term of the loan? I'm 42 so didn't think that they'd increase beyond 65


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## Brendan Burgess (18 Dec 2014)

My guesses were spot on. You are paying only €250 interest. The rest is reducing your mortgage i.e. a form of saving. 

Can you see why this is a great investment and why you must keep it?

Brendan


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## JanuaryJones (18 Dec 2014)

I must have the tax figure wrong.
If 250 pm is interest and 75% of that is tax free then 850 - 187 is our taxable amount and that would be 663 and at 50% that is 330.
Or is that wrong?


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## Brendan Burgess (18 Dec 2014)

That is correct.


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## JanuaryJones (18 Dec 2014)

Ok, so our investment is costing us 1100 per month (770 plus 330) but selling, taking the hit and getting the same deal with the bank would cost us 400 per month, if they agree. Just feels like an investment we can't afford, regardless of how good the interest rate is.


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## Delboy (18 Dec 2014)

JanuaryJones said:


> The BTL monthly mortage is 1580 and we are getting rent of 850. Realistically we could get rent of 1100 but the current social welfare tenants couldn't afford it and we'd be basically making them homeless.



Your not a charity and are under serious pressure- you need to charge market rent, simple as


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## JanuaryJones (18 Dec 2014)

Brendan Burgess said:


> Let's say the bank allows you to sell the property and keep the €80,000 shortfall as a a mortgage for the same term and the same rate. You will be paying €400 a month, but you will be getting absolutely nothing for it, other than reducing your net liability. (Of course, they may ask for a shorter term and at SVR, so you would be wiped out by that)
> 
> If you continue as you are, you will have reduced the mortgage by €80,000 in 5 years and will be out of negative equity.



So, it would make sense to hold on for another 5 years and then sell, if selling is what we're going to do? Big pain for 5 years vs lesser pain for 23?


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## Brendan Burgess (18 Dec 2014)

You are missing the point. 

This is a profitable investment and you should keep it. 



> Ok, so our investment is costing us 1100 per month


Your investment is making a profit for you.  

The income exceeds the expenditure plus tax.

The cash flow problem is that you have to pay down your mortgage.  You should try to ease that by restructuring with AIB.


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## JanuaryJones (18 Dec 2014)

Brendan Burgess said:


> You are missing the point.
> 
> This is a profitable investment and you should keep it.
> 
> ...



Is that not just kicking the can down the road? What would restructuring achieve - the capital still has to be repaid? What should I ask AIB for? Interest only? Longer term?
Sorry if I'm not getting the point.


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## 44brendan (18 Dec 2014)

I would suggest that the point being made by brendan is valid provided that you have adequate affordability to maintain this rate of "investment" over the longer term. 
You in turn appear to be making the counterpoint that your main issue of concern is affordability. You have a loan of 290k on a house worth c210k. Fortunately (or unfortunately) your financial position is such that you will have to ultimately repay the full 290k debt. 
The bank will probably agree to let you sell the BTL. However, following completion of the sale you will be left with a residual balance of c80k. The bank will want this repaid as quickly as possible. You, in turn will need to negotiate with the bank to agree a repayment schedule and to retain the current low interest rate. Depending on affordability the longest term the bank will agree to is likely to be 8 years. 
At a 1.1% fixed rate over the 8 year term ongoing repayments will be €871 pm. This is what you are looking at if you sell the property.
However if you retain the property and can manage to meet the full mortgage payments over the full term, you will then have an unencvumbered property which is likely to have increased in value at a higher rate than the mortgage interest rate you are paying. You are currently taking a voluntary hit on the rental income you could achieve, but assuming that in time you revert to charging a market rent, this will in turn cover the full interest on the loan plus a portion of the capital as per Brendan's figures. 
AIB are unlikely to agree to any changes in the current repayment schedule unless affordability is in question.


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## Brendan Burgess (18 Dec 2014)

JanuaryJones said:


> Is that not just kicking the can down the road? What would restructuring achieve - the capital still has to be repaid?



No, no, no, no, no. 

Think of it like this. If AIB agreed to switch your investment property to interest only.  This would be the result



 Rental income|€850
Interest|€250
Tax|€330 
Profit|€270
You would be making this profit on an investment of -€80,000 

If you sell this now, you will lose the profit and you will have to pay the €80,000. 

I can't think of any other way to explain it.

Just make sure you do not sell this house until at least the negative equity is cleared.


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## JanuaryJones (18 Dec 2014)

Thank you both.
It is obviously a great interest rate but I'm looking at it from the point of view of our overall finances. 
It's future reward vs current pain. There isn't much point making payments to a pension pot when that leaves you short for day to day living. We kept the house as an investment and don't have a lavish lifestyle but 2 kids, redundancy and all the tax hikes have impacted us.
I'll see if AIB will consider interest only


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## 44brendan (18 Dec 2014)

No harm in approaching AIB. However, I would'nt hold by breath on a positive outcome! AIB will want this paid down as quickly as possible.
As per my figures above the repayment pain will not be much reduced should you decide to sell the BTL and come to an agreement on terming out the residual debt! The net effect of this action is that you will have paid off the remaining balance in 8 years but will have no asset. Continuing to meet P&I for the full term will prolong the pain element but will also leave you with an unencumbered property. You could look on it as a quasi pension contribution.


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## epicaricacy (18 Dec 2014)

Why not sell it? What's the worst AIB can do? Repossess the family home and crystallise that negative equity in addition to the BTL shortfall? From my own personal experience  and of friends in various stages of mortgage distress (ppr only and / or BTL) - the people who suffer in silence and continue to repay everything never get any help from the bank.


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## 44brendan (18 Dec 2014)

This is not a question of getting any help for the bank. The OP has indicated that he has the ability to cover the residual debt from income. In the event that AIB permit the sale without agreement on the residual debt (unlikely) or that he does not meet the payment agreement on the residual amount, the bank will take judgement proceedings against him. They can then register this against any other property owned by him/them, including the family home and/or take further proceedings to obtain an installment order in the Courts. Based on the information supplied it is likely that an installment order application would be granted.


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## Brendan Burgess (18 Dec 2014)

epicaricacy said:


> Why not sell it? What's the worst AIB can do? Repossess the family home and crystallise that negative equity in addition to the BTL shortfall? .



So he loses his family home with a cheap tracker!

He loses a profitable investment with a cheap tracker!

He is in a great position now, although it's difficult for him to see it.

You would like to make him homeless with  €120k of residual debt. 

Brendan


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## epicaricacy (18 Dec 2014)

Brendan

I'm struggling with your idea of a 'profitable investment'. 
The house is in negative equity of 80,000.
The Market rent is currently 350 less than monthly repayment. What happens when int rates rise and the gap keeps getting bigger?
It's naive to assume that house prices are guaranteed to keep rising. Financial Market anxiety is rising because of Greece & Russia. 
January is writing that she's not particularly enamoured with the idea of years of hardship.
My own experience and that of my friends has been that the banks only react when people stop paying. Of course there are risks associated with standing up for yourself - but equally there are risks associated with ignoring your instincts and continuing to be the best girl / boy in the class. I'm encouraging a Socratic dialogue - where all options are considered. 
Your point re. homelessness is a little melodramatic and may serve to shut down necessary Socratic dialogue. 







Re. Homelessness -


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## JanuaryJones (18 Dec 2014)

Brendan Burgess said:


> He loses a profitable investment with a cheap tracker!
> 
> He is in a great position now, although it's difficult for him to see it.
> 
> ...



Just curious as to how you assess a good investment? Should the investment property not at least be cleaning it's face?
A 1.1% interest only tracker would be great but without the bank's agreement we don't have that. Obviously the problem is that we paid too much for the property but there isn't much we can do about that now.
Realise that property price speculation isn't allowed but our only hope is that prices rise and it comes out of negative equity sooner rather than later.


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## Butter (18 Dec 2014)

There are two sides to this equation. On one side is your contribution to keeping the house. On the other is the amount you are paying off the capital each year. I think Brendan's point is that as long as the capital reduces by more than your contribution then it is profitable. 
It might be hard to see it like that at the moment but if you sell and have to repay that €80000 at a high rate per month for years with no asset at the end, then that is a bad idea. How much would you save per month? And would it really be worth it. 

Yes, you're caught between a rock and a hard place at this moment in time. But only at this moment in time. Investing in property, shares, a savings account takes money from today to have tomorrow. In three years time your investment will look very different. 

You are entitled to charge a market rate rent by the way. You are not a charity and eventually the government will have to pay the going rate for housing social welfare tenants. It's not your job to make up that shortfall.


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## Butter (18 Dec 2014)

Looking back at the numbers you are contributing €900 a month. You are reducing your capital by about €1300 a month. 
If you sell and repay the shortfall according to one poster you could pay €871 a month. You'll save nothing by selling & will have lost your asset.


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## STEINER (18 Dec 2014)

JanuaryJones said:


> At the moment we are paying both mortgages in full but it is killing us



That is the key issue here, current and future repayment capacity. You are having difficulty now, perhaps in a pre-arrears stage. When the ECB rate eventually rises from the current almost zero rate, a lot of people will be affected by increased tracker repayments leading to arrears and defaults.

Some observations.......

CBI has guidelines concerning sustainability of a mortgage, which have to take into account both borrower affordability and the capital impact for the bank.

The 3 modes of a sustainable solution are;

1. Forbearance (some change to original repayment terms)
2. Personal Insolvency Arrangement
3. Repossession (voluntary or otherwise)

Under Provision 46 the bank can seek to move you off your tracker if the new alternative repayment arrangement is 

a) affordable for you
b) a long-term sustainable solution consistent with CBI policy

As the bank is losing money on your tracker, extending your term compounds the loss further for the bank, therefore it is not sustainable per the guidelines.

Interest only is not a sustainable solution for a tracker mortgage.  Interest only can be a sustainable solution for SVR mortgages for low LTVs and also potentially for all BTLs. 

So, if you want to keep your rental property and can't afford the agreed current tracker repayment schedule, CBI sustainability guidelines will guide a revised arrangement which doesn't include your tracker at your current rate.

What is the original LTV% of the rental property mortgage?  I don't consider it a BTL as it wasn't bought to let as such, presumably it is/was a private residential mortgage.  My basic understanding is that there can be differences in the contracts.


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## JanuaryJones (18 Dec 2014)

STEINER said:


> What is the original LTV% of the rental property mortgage?  I don't consider it a BTL as it wasn't bought to let as such, presumably it is/was a private residential mortgage.  My basic understanding is that there can be differences in the contracts.



It was valued at 410k in 2006 and the mortgage on it was 340k. It is a BTL mortgage and the first 3 years were interest only. There were a few periods of interest only in between (maternity leave etc).


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## Brendan Burgess (18 Dec 2014)

epicaricacy said:


> I'm struggling with your idea of a 'profitable investment'.
> The house is in negative equity of 80,000.
> The Market rent is currently 350 less than monthly repayment.



You clearly are struggling with distinguishing between capital and interest payments.  It's fairly basic, so I don't really know how I can express it any more clearly. But I will try...

Say you have a loan of €300k at 1% over 10 years on a property worth €300k.

The rent is €600 a month.

Is this a profitable investment or not?


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## Brendan Burgess (19 Dec 2014)

Hi January and epi

I have set out a systematic approach to the problem in this Key Post 

Should I sell my home in negative equity or rent it out? Brendan Burgess April 2011


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## Brendan Burgess (19 Dec 2014)

Hi January 

There is a very important point here which many people miss.

Your home is protected by the Code of Conduct on Mortgage Arrears. Your investment property is not. 

If you go into arrears on the investment property mortgage, the lender can move fairly quickly on repossession. They might also be able to appoint a receiver. While these are unlikely to happen, they could happen. 

They are extremely unlikely to happen to you if you go into arrears on your home loan as it's protected by the CCMA and a general sympathetic approach anyway. 

So if you find that you cannot keep up both payments, then pay the investment property mortgage in full.  Go into arrears on your home loan. You are more likely to get a rescheduling of your home loan than your investment property. If you are paying the interest on your home loan in full, and some capital, then the bank is unlikely to take any action other than calling your and sending you letters.


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## 44brendan (19 Dec 2014)

> You are more likely to get a rescheduling of your home loan than your investment property.


Not the case I'm afraid!! Any request to a bank for forbearance will be treated in accordance with affordability. I.e. Amount of funds available to meet loan repayments after deduction of standard living expenses. Every bank will expect that Home Loan payments are prioritised. I.e. in order to be regarded as complying with MARP you will be expected to meet HL repayments first and if you don't the Bank can treat you as non-cooperating and exit you from MARP.


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## Brendan Burgess (19 Dec 2014)

Hi brendan

Very good point. 

So let's say January goes into AIB and they refuse a restructuring because they reckon he can afford the full repayments. But January is stuck and can't make the full repayments. He has to choose between the home loan or the investment loan? Which one would you recommend that the prioritise? 

Brendan


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## 44brendan (19 Dec 2014)

He will need to prioritise the HL repayments Brendan! As I mentioned in my previous post MARP may seem like an option. However, from my own experience I am seeing the ASU departments of all banks not accepting any deviation from HL prioritisation. I.e In the majority of circumstances those in MARP must pay their HL first. If not they can be exited from MARP and while reposession may not be an immediate risk, surcharge will be applied to loan arrears and a bank is entitled to commence proceedings for either reposession or other!


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## Brendan Burgess (19 Dec 2014)

44brendan said:


> surcharge will be applied to loan arrears and a bank is entitled to commence proceedings for either reposession or other!



Hi brendan

Has this happened in practice? I have not yet heard of anyone being charged a surcharge of interest on their home loan. They are allowed to do it, and I think it's a good idea for tracker mortgages. It's just I have not heard of it yet.


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## 44brendan (19 Dec 2014)

Yes it has Brendan. I have seen these decisions been made by our own ASU department and I have also seen letters sent out by competitor banks. There is a change now occuring (some banks leading the charge) where revised repayment proposals are not being implemented unless external loan repayments are either reduced or stopped altogether. 
I don't want to alarm anyone as some banks are less aggressive than others on this, but those who are prioritising external payments need to be aware that this will not be tolerated on an ongoing basis. The CB are totally behind this and in a recent audit have commented on the leniency being given to some mortgage holders.


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## Macavity (19 Dec 2014)

We take the total external debt owed, extend it over 60 months and then allow for 20% to be repaid. If borrowers don't make the payments in line with this affordability, the restructure is withdrawn. We do allow 6 months for them to restructure the external debt.


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## Brendan Burgess (20 Dec 2014)

Macavity, I presume that is for unsecured debt only.

In this case, the OP has two mortgages with the same bank, AIB.


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