negative equity and terminal illness... best move?

[splashingaround]

My friend owned a home with her ex, bought him out when they spilt whilst borrowing more on its value. She hasn't lived there since moving in with her dh, its rent income just covers mortgage but that is interest only. Current house in dh name only and she has a terminal diagnosis but could well be well for a good while, still working etc.

She wants to sell the house but is stuck because of the negative equity and really just wants rid of it. Could she not just default/give it back to the bank in light of her diagnosis or would they be after her for money as she is still working?

Does anyone know?

Thanks bran,

It didn't sound callous, nothing sounds right...

She did say a while ago that she didn't have insurance but I wonder whether she meant excluding the usual house cover? We talked about it because I know my policies would have paid out on diagnosis as initially it was very bleak, well still is but in comparison... although she is awful with money, maybe it lapsed.

It would be enormously helpful if it could be sold for profit because of life assurance, they may not have thought of that because at the minute they are worried about the DIY it needs and what happens if interest rates go up.

I think if a bank sale might leave a bigger debt, that would worry them. Their estimation of how much they would owe is about half of what I think if is after studying the area and speaking to an agent so they already have some possible expectation readjustment.

Distinct shortage of magic wands all round. Thanks again.

My DH's Dad died in 2010 and DH's Auntie got the mortgage paid and loans against the house paid off too by the insurance company and then she went onto sell the house just a few months after . He was only 46 so had quite a few years left on his mortgage but it was paid off! I would suggest your friend finding out if this would be possible rather than selling the house now.

She will have a mortgage on House 1 (the one she rents out) and presumably life insurance to cover the mortgage. It depends what type of cover she has - you can have "level cover" or "reducing cover". Iif she had level cover (i.e. she has insurance to cover the level of the mortgage as it was when she took it out - thats to say it stays the same regardless of the fact she will have been reducing the mortgage by making payments every month) then the insurance pay out might be more than the amount she owes, and enough to cover the negative equity. If the level of cover decreases in line with the reducing mortgage, there will be a deficit and the bank would pursue her for the difference if she gave up possession of the house. In addition, the bank would incur costs in selling the property on, she'd have no say in what it was sold for so she could end up with an even bigger debt.

The other thing to check is that most policies have some sort of timescale in for a terminal illness - I know ours require a diagnosis of life expectancy less than 12 months so if she is likely to be well for a while, they may not pay out at all.

Her DH is unlikely to benefit from any life insurance / mortgage protection she has because HOuse 2 is in his sole name so the mortgage will be in his sole name and unaffected by her death. Sorry to sound so blunt.