Brendan Burgess
Founder
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When the joint owners of a property in negative equity want to split up, there can be some very serious problems.
1) The “correct” solution is not usually a viable option
Jack and Jill have a house worth €300k and a mortgage of €400k. Jack wants to leave but Jill wants to keep it.
Jill should buy the other half of the house for €150k.
Jack should repay €50k to the bank.
Jill will have a mortgage of €350k on a house worth €300k – so she will have €50k negative equity.
However, this is not usually viable because
1)[FONT="] [/FONT]Jack does not have the €50k to repay to the bank.
2)[FONT="] [/FONT]The bank is not happy to give Jill a mortgage of €350k in her own name.
The bank needs to be flexible and should look favourable on extending the increased loan to Jill even if it stretches their salary multiple guidelines. This may even be on a temporary basis pending sale of the house. If Jill shows that she can keep up the repayments, then the bank don’t need to take any action.
Jack will want his name off the mortgage, but the bank lends money on the basis that the borrowers would be jointly and severally liable. So if Jill is unable to keep up the repayments, then Jack is still responsible for them.
Likewise, if Jack doesn’t pay off his loan of €50k, Jill would be responsible for it.
1a) Mary buys Jack’s share for €150k
Mary, a friend of Jill’s, with whom she is happy to share a house, buys Jack’s share for €150k. Mary could take over €150k of the mortgage or Mary could bring in her own cash thus reducing the negative equity overall. Jack still owes €50k and should have a personal loan for it from the bank.
Of course, Mary could be a friend of Jill who buys the share of the house to help Jill out. Mary would get the rent from the house and pass it on to Jill.
2)The house is sold leaving Jack and Jill with a deficit of €100k still owing to the bank.
This will still be a joint loan. If Jack does not pay his share, Jill will be liable for it.
The administration of the law should be changed to make it easier for Jill to pursue Jack for the deficit. If Jack has a pension fund, then Jill should be able to access it to pay off the debt.
3)[FONT="] [/FONT]Where Jack just abandons the house and the loan.
In some cases, Jack just abandons the house and the loan. This leaves it up to Jill to keep up the repayments on her own. Jack doesn’t care that he is destroying both his own and Jill’s credit rating. Sometimes Jill can’t voluntarily sell the property, as she needs Jack’s agreement and he often has disappeared or just refuses to cooperate.
If Jill is going to try to retain the house, the lender should split the loan into two parts, so that Jack’s loan is separately identified. Jack’s loan will have the interest rolled up on it. Jill’s half will be reducing if she is keeping up with her mortgage repayments. They will be still both responsible for each other’s loans, but in the event of litigation between them, there will be a clear record of who paid what and who now owes what.
As with all negative equity cases, they should be able to access their pension fund to eliminate the negative equity.
The legal process should be streamlined, so that the bank or Jill could enforce their debt against Jack more easily.
General principles for resolving these problems
1)[FONT="] [/FONT]Allow people with pension funds to access them to reduce the negative equity
2)[FONT="] [/FONT]Streamline the legal process so that it’s easier for lenders and the responsible joint owner to enforce a judgement against the irresponsible owner.
3)[FONT="] [/FONT]The bank should split the mortgage in two parts, so that the repayments are set against the responsible person’s part of the mortgage. The interest will roll up against the irresponsible person’s part.
4)[FONT="] [/FONT]Switch the loans to interest only to make them more affordable.
5)[FONT="] [/FONT]Stretch the lending criteria to enable the mortgage to be switched into one person’s name – perhaps in exchange for a an agreement to grant the bank an order for possession of the house, which can be implemented easily if the borrower defaults.
1) The “correct” solution is not usually a viable option
Jack and Jill have a house worth €300k and a mortgage of €400k. Jack wants to leave but Jill wants to keep it.
Jill should buy the other half of the house for €150k.
Jack should repay €50k to the bank.
Jill will have a mortgage of €350k on a house worth €300k – so she will have €50k negative equity.
However, this is not usually viable because
1)[FONT="] [/FONT]Jack does not have the €50k to repay to the bank.
2)[FONT="] [/FONT]The bank is not happy to give Jill a mortgage of €350k in her own name.
The bank needs to be flexible and should look favourable on extending the increased loan to Jill even if it stretches their salary multiple guidelines. This may even be on a temporary basis pending sale of the house. If Jill shows that she can keep up the repayments, then the bank don’t need to take any action.
Jack will want his name off the mortgage, but the bank lends money on the basis that the borrowers would be jointly and severally liable. So if Jill is unable to keep up the repayments, then Jack is still responsible for them.
Likewise, if Jack doesn’t pay off his loan of €50k, Jill would be responsible for it.
1a) Mary buys Jack’s share for €150k
Mary, a friend of Jill’s, with whom she is happy to share a house, buys Jack’s share for €150k. Mary could take over €150k of the mortgage or Mary could bring in her own cash thus reducing the negative equity overall. Jack still owes €50k and should have a personal loan for it from the bank.
Of course, Mary could be a friend of Jill who buys the share of the house to help Jill out. Mary would get the rent from the house and pass it on to Jill.
2)The house is sold leaving Jack and Jill with a deficit of €100k still owing to the bank.
This will still be a joint loan. If Jack does not pay his share, Jill will be liable for it.
The administration of the law should be changed to make it easier for Jill to pursue Jack for the deficit. If Jack has a pension fund, then Jill should be able to access it to pay off the debt.
3)[FONT="] [/FONT]Where Jack just abandons the house and the loan.
In some cases, Jack just abandons the house and the loan. This leaves it up to Jill to keep up the repayments on her own. Jack doesn’t care that he is destroying both his own and Jill’s credit rating. Sometimes Jill can’t voluntarily sell the property, as she needs Jack’s agreement and he often has disappeared or just refuses to cooperate.
If Jill is going to try to retain the house, the lender should split the loan into two parts, so that Jack’s loan is separately identified. Jack’s loan will have the interest rolled up on it. Jill’s half will be reducing if she is keeping up with her mortgage repayments. They will be still both responsible for each other’s loans, but in the event of litigation between them, there will be a clear record of who paid what and who now owes what.
As with all negative equity cases, they should be able to access their pension fund to eliminate the negative equity.
The legal process should be streamlined, so that the bank or Jill could enforce their debt against Jack more easily.
General principles for resolving these problems
1)[FONT="] [/FONT]Allow people with pension funds to access them to reduce the negative equity
2)[FONT="] [/FONT]Streamline the legal process so that it’s easier for lenders and the responsible joint owner to enforce a judgement against the irresponsible owner.
3)[FONT="] [/FONT]The bank should split the mortgage in two parts, so that the repayments are set against the responsible person’s part of the mortgage. The interest will roll up against the irresponsible person’s part.
4)[FONT="] [/FONT]Switch the loans to interest only to make them more affordable.
5)[FONT="] [/FONT]Stretch the lending criteria to enable the mortgage to be switched into one person’s name – perhaps in exchange for a an agreement to grant the bank an order for possession of the house, which can be implemented easily if the borrower defaults.