Key Post Bank is allowing me to sell but wants to convert the shortfall into an unsecured loan

This has come up a few times, so I would like to develop a systematic approach to how to deal with it.

Let's take the case of a couple with a family home in Cork but they need to move to Dublin for family or work reasons.

The lender has agreed to allow them to sell the house for less than the mortgage outstanding but they must agree to sign a document to pay off the unsecured loan over the remaining term of the mortgage and at the mortgage rate.

Option 1 - Rent out the house instead of selling it
Option 2 - Agree with the bank's proposal
Option 3 - Hand back the keys to the bank

Option 1 - Rent out the house instead of selling it

Most people do a very simple calculation along the following lines:
"The mortgage is €1,500 per month.
The rent is €1,000 per month

so I am losing €500 per month"

This is not the correct way to look at it. One should not be comparing the mortgage repayment with the rent received as the mortgage repayment includes a capital element. To calculate the viability of renting out a property, compare the rent received with the interest paid and the other costs of being a landlord. Interest rates are low at the moment and rents are comparatively high in most areas. It nearly always makes sense to rent out the house.

This is discussed in more detail here

"Should I sell my home in negative equity or keep it and sell it?"

Option 2 - Agree with the bank's proposal

Some people see the bank as imposing some agreement on them. But the reality is that a borrower has an obligation to repay the loan. The agreement reached with the bank does not impose any extra legal obligation which they did not already have.

The bank's purpose in getting the borrower to sign this agreement is to make sure that they fully realise that the bank is giving permission to sell but is not writing off the shortfall. It prevents the borrower from claiming at some later stage that the bank said that they would not pursue the shortfall.

Option 2A - Negotiate the bank's proposal

In most cases, the banks seem happy enough to accept repayment of the shortfall over the remaining period of the mortgage at the mortgage rate. In other cases, they try to get the shortfall repaid much sooner. In such cases, you should ask to extend it.

If you have good salaries, the bank will pursue the shortfall.

If you are in dire straits, they can't get blood out of a stone, so while they won't write it off, they probably won't pursue it either.

If you have a cheap tracker, you may be able to get the bank to write off some of the shortfall. But if you have a cheap tracker, it's very likely that you are much better off retaining the property, and renting it out.

If you do not want to retain the property as an investment, then you should accept the bank's proposal
As it does not give you any additional legal obligations, you should accept the bank's proposals.

You will be able to negotiate a deal on an unsecured loan much more easily than on a secured mortgage. For example, if a relative agrees to pay a lump-sum to clear the debt, the lender would probably grab it.

If you have to avail of the new Personal Insolvency Act, it is likely that a Debt Settlement Arrangement for unsecured debts will be much simpler to agree than a Personal Insolvency Arrangement for a secured mortgage.

If you choose to avail of UK bankruptcy, then it is much simpler if the Official Assignee does not have to deal with a property and a mortgage.

Option 3 - Hand back the keys to the bank

I don't see this as ever having an advantage over the other options. The bank will sell the house eventually and will get a lot less than you would get selling it in an orderly manner.

You will still be legally obliged to pay the shortfall, but it will be much bigger.

We have a joint mortgage but we are splitting up. Will the bank split the shortfall?
Unlikely. You are jointly and severally liable for the mortgage and the shortfall. If your ex does not pay their share, then you will still be on the hook for it.

Again, you could try some deal with them. Let's say that the shortfall is €80,000 and they have agreed that you will jointly pay it off over the next 20 years at the mortgage rate. You might propose that in exchange for them splitting it into two separate loans of €40,000, that you will pay off your share over 10 years.

Issues around tracker mortgages

The bank is losing a lot of money on your tracker mortgage, so you should be able to get a deal more easily.

If it's a Bank of Scotland loan, then they are very open to negotiation as they want to leave the Irish market.

But if it's a tracker, the chances are that you will be better retaining the home and renting it out.