OK, this is a very complicated one. But the first thing to understand is how good your actual investment is.
Property costing c.4k a year between us to cover shortfall in mortgage/tax/service charges
You are saying "Rent - repayments - tax - service charges" = loss of €4k
This is not the right way to look at it.
Your rent seems to be around €12,000 a year. You are paying around €2,000 interest. So you are making a profit of €10,000 a year before charges and income tax. Most of your repayments are capital, so you are fairly quickly paying down the negative equity. If I were your friend, I would not be paying €20,000 to exit this. I would pay the €2,000 a year and watch the negative equity evaporate in time.
If your friend is happy to pay the €20,000, then you should first ask UB to allow you to take over the mortgage from him. It's not clear that they will. If they refuse, then you can ask them to allow your wife take over the mortgage from him. Again, it's not clear that they will do so. They might ask for some of the negative equity to be paid down.
What is your wife's income? How much could she borrow as a FTB? Is there any possibility she could buy a home on her own? I presume not.
Overall Option 2 seems the best.
You are in €50k Negative Equity now, so being in €80 NE is not that big an increase.
The 5 years of the tracker will be a help. It will give you time to make a lot of capital repayments before the higher interest rate kicks in.
I assume that renting a house would be a lot more expensive than paying interest on a mortgage to buy that house. Interest rates will fall in the short term but then they will rise in the medium term. It looks as if the shortage of housing and lack of building is going to put up rents.
In conclusion, as you can afford to buy a house, you should probably do so.
Brendan