Key Post A guide to splitting up when in negative equity

[Brendan Burgess]

Joint mortgage, split up, negative equity

If John agrees to buy Mary out, the following has to happen...

John buys Mary's share of the property for its value - €60k
John takes over €60k of Mary's mortgage
Mary would have to pay the lender €40k or take out a loan of €40k.

So the revised position would be

|total|John|Mary
Mortgage|€160k|€160k|0
Loan|€40k|0|€40k
Value|€120k|€120k|0
Negative equity|€80k|€40k|€40k

John would have to be able to service a mortgage of €160k on his own.

Before the split up, the bank has a joint loan. If Mary does not pay her share, John is responsible for it. So the bank is giving up a fair bit of security and will only agree to this if there is some compensation.

What might encourage the bank to agree to this?

If Mary can actually pay €40k cash off the loan, the bank may well consider it, as it is reducing their total loan and their negative equity.

The bank might agree to convert the €40k into a personal loan at personal loan interest rates. If Mary has a guarantor, they might be more open.

If the original mortgage is a cheap tracker, the bank might be open to replacing it with a mortgage at a higher interest rate.




If John can't afford a mortgage of €160k on his own...
John's could ask someone else (Anne) to buy Mary's share of the house for €60k. Mary would still have to find the €40k shortfall.

Anne should not agree to a simple replacement of Mary on the house and the mortgage. By doing so, she would be paying €100k for a share of a house worth €60k.

If John can afford a mortgage of €200k on his own...
The bank might allow John to take over the full mortgage on his own. If he does this, he would be paying €100k for €60k worth of house. He could have a side agreement with Mary that she repays the loan to John over time.

 

[Brendan Burgess]

Joint mortgage, split up, negative equity

If the bank does not agree to give John a full mortgage, John and Mary can enter into a side agreement.

For simplicity, let's say that Mary pays €40k off the mortgage, so the revised position is

|total|John|Mary
Mortgage|€160k|€100k|€60k
Value|€120k|€60k|€60k
Negative equity|€40k|€40k|0

John should get a written and legally binding agreement that will oblige him to make all mortgage payments and - subject to his having done so -will oblige Mary in the future to transfer her interest in the property to him on demand and upon his securing his release from the obligations of the mortgage.

John can also enter into this agreement and let Mary off the €40k if he wishes.


This is an agreement between John and Mary, but in law, Mary still has a mortgage.
If John goes into arrears, Mary's credit record will be hit.
If John does not make the repayments, Mary is still jointly and severally liable.
Mary will be regarded by other lenders as already having a mortgage, so she will find it difficult to get a loan elsewhere.

 

[Brendan Burgess]

Joint mortgage, split up, negative equity

Calculating a fair price for Mary to buy out her negative equity

|total|John|Mary
Mortgage|€200k|€100k|€100k
Value|€120k|€60k|€60k
Negative equity|€80k|€40k|€40k

In this case, it is fairly simple. It is assumed that they own the house equally, they share the mortgage equally and that they have shared the mortgage repayments equally.

But what about unequal mortgages and ownership?

|total|John|Mary
Cost of house|€240k|€120k|€120k
Less deposit|€ 40k|€40k|0
Mortgage|€200k|€80k|€120k
Value|€120k|€60k|€60k
Negative equity|€80k|€20k|€60k

In this case, a fair price for Mary would be to pay €60k off the mortgage

Other complicating factors
The above assumes that they shared the mortgage repayments. Maybe Mary paid more of the repayments, as she paid no deposit?
The above assumes that they own the house equally. Mary could argue that she owns less than half of the house and therefore owes less than half of the negative equity.
The above shows the mortgage today being the same as it was when they bought the house i.e. they made no capital repayments. In practice, few loans are interest only so some of the capital has been repaid. This won't matter if they shared the repayments equally, but what if Mary paid a lump-sum off the mortgage?

 

[Brendan Burgess]

Key Post: Will the bank allow me to get his name off the mortgage? Examples of where different banks did allow this

Sara - Ex refuses to pay, and now after four years, wants to move back in

Arches 1 - Case study: Ex paying nothing, €60k of negative equity

Mulc - Jointly owned with my sister, I want to sell, she refuses

Jules 30 - ex husband refuses to pay mortgage

Dee 1 -(6/6/2012) ex thinking of going bankrupt. Where does that leave me?


I have moved out - can I do anything about the mortgage?

Ando - Bank will let me off joint mortgage if I can pay €40,000 towards negative equity, but I don't have €40,000

Swordsman - I have moved out, in a new relationship, want out of joint mortgage



Miscellaneous problems

We had two houses. Split up. Now he is in arrears on his

Atreyu007 Joint home owner doesn’t want to pay his share of mortgage and has disappeared

 

[chewyluey]

If John can't afford a mortgage of €160k on his own...
John's could ask someone else (Anne) to buy Mary's share of the house for €60k. Mary would still have to find the €40k shortfall.

Anne should not agree to a simple replacement of Mary on the house and the mortgage. By doing so, she would be paying €100k for a share of a house worth €60k.

Assuming Mary clears or restructures her €40k shortfall.
Obviously Anne will have to satisfy the bank's lending terms (multiple of salary) to replace Mary on the mortgage.
If Anne's salary meets the requirement for a €60k mortgage is that all she needs or would Anne also need to satisfy some form of deposit requirement as she would if buying a new house ?

Also, assuming John & Anne are in a relationship would the bank insist on a new mortgage where their combined eligibility is reassessed or is their relationship irrelevant and only Anne's eligibility for half of the mortgage is evaluated as a direct swap for Mary ?

Thanks

 

[44brendan]

The original scenario as presented above envisages Anne taking over 60k of the mortgage debt from Mary. With Mary reducing the loan by 40K. End result (assuming bank approval) would be a new loan of 160k in John & Anne's names. Anne is taking a high risk here as she will be fully liable for the new loan of 160k on a property valued at 120k. In theory it is possible but in practice it would be both difficult to obtain bank approval and unlikely to be fair to Anne.
A new mortgage would be required as there is no legal way to change the existing agreement to substitute Anne for Mary. The bank would complete a full assessment on Anne as she would need to be at least as strong a counterparty financially as Mary in order for them to approve the deal. I have never seen this done.