Negotiating with Lenders re: negative equity and trading up

[Gus2008]

I'm looking for some thoughts on an offer I have been given. My gut instinct is that it won't work, but I figured it is worth considering at least and I’d appreciate any views.

My parents are selling the family home to move abroad. The mortgage was cleared years ago, so whatever they sell for will be purely profit. They would like to keep the home in our family, but myself and Mrs Gus are the only family members who haven’t a) bought a forever house already or b) are settled enough to consider purchasing it. In light of this, if we were to purchase it, we would pay considerably less than the current market value. Probably between 25% and 40% less.

We currently have an apartment with a tracker mortgage and we are in negative equity somewhere between €80k and €100k and we have virtually no savings due to recent wedding. Our plan, prior to this offer, was to overpay our mortgage by double the due amount (approx. €1,000 a month, so overpay by €12,000 per annum) for the next 4-5 years and hopefully then sell the apartment (breaking even) and buy a family house then.

So, for example, here are some figures:

Family Home
Current Market Value €400,000
Cost to Us (less 40%) €240,000
Mortgage @ LTV 85% €340,000

Apartment
Current Market Value €180,000
Mortgage Outstanding €270,000
Negative Equity €90,000

As I see it, we have three options that we can afford based on what we intend to spend on mortgage repayments per month:

1. Attempt to negotiate with lender to carry negative equity from apartment into the mortgage on family home on basis that we will be buying at less than market value and losing our tracker rate.
2. Apply for second mortgage to cover family home and rent out apartment.
3. Forget the whole thing, increase payments on our mortgage as planned and wait to clear the negative equity before attempting to sell.

 

[Commercial]

Gus, could you keep your apartment and pay your parents €1000 a month in return for transferring the property into your name as a buy to let scheme?
Rent out your own apartment to cover the repayments on that.
When things turn, buy your parents house outright and sell or keep your apartment??

 

[Gus2008]

Thanks for reply Commercial.

I would rather not engage in a protracted repayment process with my parents- they want to move and I would sooner see them leave with the money in a lump sum rather than give it to them in drips and drabs.

Any other views?

 

[orka]

1. Attempt to negotiate with lender to carry negative equity from apartment into the mortgage on family home on basis that we will be buying at less than market value and losing our tracker rate.

You don't mention it yourself explicitly but I presume you can see the huge carrot you have to offer the bank if they were to facilitate your move - that you would no longer be in negative equity (value 400K, mortgage 240K + 90K NE carry = 330K - so positive equity of 70K) - I would imagine that would be very attractive to them, on top of the incentive of taking away your tracker. Obviously the whole thing would be subject to you being able to comfortably service a 330K mortgage.

 

[Gus2008]

Yes Orka. Of course, that's assuming they will consider giving us an 80%-85% LTV mortgage on the family home. With virtually no savings, this might be a problem. They are effectively swapping one debt (apartment) for another (family home) and increasing the amount we owe them by 60k. Whilst it is a debt secured on a "better" asset, they may not see it like that.

 

[Importer]

Heres what you do

Apply for a mortgage of 330K secured on the house worth 400K

Tell the banks that if the mortgage application is accepted, you will be selling the apartment and getting a gift from your parents of 90K to pay off the negative equity on the apartment. (Your parents only need 240K for the house)

So the only thing to consider is whether the bank will lend you 330K on the 400K house......