What options with negative equity?

[Bupcake]

DH owned a house before we met, but it was in negative equity. I can't remember the exact figures, but he bought it for about £170k and it's now worth under £100k. He has an interest-only mortgage, which costs us £600 per month.

I own (outright) the house we live in. It's probably worth roughly £100k.

We would like to move at some point to somewhere slightly bigger. However, DH insists that nothing can be done with his house because of the negative equity. He refuses to discuss it (he's normally very good with financial matters, so I think he's embarrassed about this). I'd like to go and talk to the bank and see what our options are, but he won't do that. He says we just have to wait until it's back up to it's original value, and then sell it.

DH says we have 2 options if we want to move:

1. We sell our current house (the one I own), and use that to buy somewhere else at roughly the same value. We would still have the mortgage each month for his house. Then, when his house reaches the value he paid for it, we sell it to pay off the mortgage.

1. We keep both current houses, and take out a mortgage on a new house. We'd look at renting out one or both houses to bring in money to cover part of the mortgage. Our current house would be an investment for the future. However, I can't see any way we'd get a mortgage to buy somewhere the size of our current house (given that DH already has £600 going out each month).

I wonder though whether we might have a third option of selling both current houses, and using the combined money to buy somewhere bigger? DH doesn't think the bank will allow this, but I think it's at least worth discussing with them. Obviously we'd still have the mortgage on the interest from his original house, but at least we'd have a house with enough room.

DH feels he was 'stung' by the housing market collapse, and wants to try to claw back some of what he lost. I feel we should sell his house and move on. DH earns about £2.4k per month; I'm a SAHP at the moment, but may go back to work part time when the kids are at school. We're not big spenders, and are able to save between £500-£1000 each month after bills, mortgages and expenses. We could probably rein ourselves in a bit more if we had to.

Does anyone have any advice? What kinds of options do we have here? Is DH being sensible, or would my idea work?

I'm going to have to convince him to let me see the figures, and to talk to the bank, I think.

I can't see how we have any real options in terms of buying another house unless he sorts this out in some way. I definitely think his idea of renting out our current house as well as his own one, and getting a mortgage to buy a new house, is a non-starter.

That makes sense, titchy. Is it (theoretically) possible to get the £35k mortgage secured on my house instead?

Yes that is right - he'd have paid more in interest than it's worth, and still be owing £135k. How do you think banks make their money!

It's all such a headache! Thank goodness we have my house at least! I admit I'm incredibly fortunate to have inherited a house, otherwise we'd really be sunk.

That's insane, titchy! It sounds like we really need to prioritise paying off more of the mortgage each month, would that be right?

Or we need to rob a bank?

You would not get a mortgage with no income. You would have to transfer the deeds of your house to his name for him to get a mortgage. But I doubt he'd get one as he already has one in negative equity.

If your house is mortgage free, can you rent that out, and live in his house?
What savings vehicle has he got to pay off the capital at the end of the mortgage? Your spare cash should really be going somewhere so you have 170,000 at the end of the mortgage, in cash somewhere (or 160,000 if he had a 10 k deposit).

But yes, if you sell his house, you need to be able to come up with all the money owed. On your figures in the first message, and interest only, you will need 70k cash to sell his house.

Ah, ok, yes. Makes sense, Tigger.

In your position I wouldn't be looking to buy a 3rd house. Sounds like your housing market is similar to where I am in which case I don't think it will be recovering soon. Makes no sense to rent out if the rent isn't even covering the mortgage payments, especially as you would have to factor in costs of maintaining the property etc.

Would you consider selling your home and moving into his? If I read your figures right this would give you £100k to set against his outstanding mortgage of £135k. (You would then only be paying out on a £35k mortgage). You could then sell his for £100k and realise a deposit for a mortgage on a bigger house of £65k less selling costs.

If it makes you feel any better I actually know quite a lot of people in a similar position to you and your dh so I would say you are not any more financially naive than average.

Living in his house isn't really an option; it's too small. We wouldn't physically fit in it.

We do have ISAs etc; it'll be a few more years before we manage to have £70k, but it's feasible over 10 years or so. I think his original plan was to switch to a repayment mortgage after a couple of years, but then the bottom fell out of the market and that wasn't possible.

Now I think his plan is to wait until the house reaches it's original price and then sell it.

Your DH needs to show you his mortgage statements, so you can see whether:

1. it's interest only - in which case he's been paying the interest payments, and he will still owe the £170k in capital at the end of the mortgage term, or you will need to repay £170k when it is sold - and your figures really don't add up - if you sell his house for £100k, you will need to find £70k from somewhere, and you won't be able to wait on the sale of your house to find this, as the bank will not release the mortgage unless the £70k is paid off. No-one will buy a house with an outstanding mortgage. So you would need to sell your house first, or at the same time so that you can pay off the whole of the debt owed on his house.
   Assuming your figures, this way you will have £30k deposit for a new property.

or

2. it's a repayment mortgage, and the capital has been paid down bit by bit. In which case, you may find he only owes £135k, as you seem to think. You will still need to find the outstanding £35k when you sell the house for the same reasons as above. Assuming you sell your house before or at the same time, you can use £35k from your sale to pay this off, and have £65k towards a new property.

Interest only mortgages have declined in popularity in the last decade precisely because so many people found themselves in your DH's position - they paid off the interest, but the house wasn't worth what they bought it for at the end of the term, and they have to find the money from somewhere. When I had an interest only mortgage years ago, I had to prove that I had set up a way to pay off the capital at the end of the term.

You really need to talk to his lender!

He took out a loan for £170k minus his deposit in which he has an interest only mortgage which he pays £600 a month on. He definitely needs to get tenants in to reduce the amount you are loosing each month but this will still cost £200 after receiving £400 rent, you will pay no tax on this income though as you will be making a loss.

How much do you have in savings? If you have any savings, I would consider paying off some of the loan as it will reduce the amount you pay in loan interest by more than you are earning in savings interest. Do get independent advise to see if there are any other options.

At £500 - £1,000 per month on an income of £2,400 despite paying two mortgages, you could save £12,000 a year which would pay back the £70k negative equity in 6 years.

You will then be in a position to sell the house and walk away from it.

How much do you pay on your mortgage? Is it repayment or interest only? How long have you had the mortgage? How much equity do you have in it? When you have cleared the other loan, you could use the equity in your house for a deposit and get a mortgage based on your husbands salary.

Use the calculators on moneysavingexpert.com to see how much you might be able to borrow.

That plus your deposit from the equity in your house will be the amount you can borrow.

The idea in an interest only mortgage is that you have some other way of paying it off at the end - eg an insurance policy (or endowment although they are now discredited).

We have an interest only mortgage (was supposed to be repayment but somehow the paperwork got confused). But we had huge equity in the house (we were remortgaging to build an extension) and were able to overpay every month and reduce the amount in that way. We were also luckily to get tied into a stupidly low rate (0.5% above base rate) - so we are in the unusual situation that it is better for us to borrow on the mortgage and save elsewhere and make a little bit of profit.

So interest only mortgages can work for some - but you need to know what you are getting in to.

Before you do anything else - maybe look up the different types of mortgage online to get a feel for how they work.

You might find this - useful - it is free and has a week on mortgages - but also explains the rest of finance well. I did it with my teenage kids earlier in the year.

Thing is, howabout, at the time he bought, I was considering buying a house myself (I hadn't inherited this house at that point; I didn't know I was going to). I decided against it because I thought the market was bound to crash soon. So it's very annoying to be stuck in this position anyway!!

He does have life insurance, which would pay off his mortgage in the event of his untimely death... Think, on balance, I'd miss him too much, though (even if he is a friggin' liability)

How you got to this position is not important now (you are there). How best to get out of it.

So either sell your house and cash in your isas - pay off his molrtgage, sell his house. And see what you have left to put to a new house. Or keep both, rent out his, pay off as much of his mortgage as possible with your current savings and overpay monthly ongoing - work out how long before you are out of the negative equity.

If you don't understand how it works, you are likely to need someone to explain it to you - do CAB still have money advisers ? They might be able to talk through options before you talk to the lender.

But you need to do something - you are throwing away money on the interest only mortgage at present.

That's what I'm thinking, rockenholt. He's burying his head in the sand, but we could be doing something to improve things if he would take advice.

I'll see if I can get him to show me the figures and then look at the options.

Throwing away money on an interest only mortgage that is neither saving you rent nor going to make a capital gain when you sell it.

You need to consider if your ISA's are gaining at a rate that outweighs the amount that cash could save you in interest payments on the mortgage.

Just wanted to point out that although he may have bought the house for 170k he could have put down a 35k deposit and therefore only owe 135k with an interest only mortgage. No reason to assume he's wrong/lying.

His original mortgage wasn't necessarily for £170k - he might have put down a deposit. But he really needs to be open with you about what he owes and then you can decide what your options are.

It's possible he had a decent deposit when he bought - as I said, he's quite good at saving money, and at the point he bought, would have been working for a few years and living with his parents rent-free.

I'm going to sit him down and see what the exact figures are, and then we can decide where to go for advice. I'll maybe look into doing a bit of work earlier than planned (I can do some from home) so we could potentially pay a bit more off the mortgage.

This thread has made me realise how much he's ignoring the issue. Thanks for all the help and advice.

He won't get a BTL mortgage for the house, they require a minimum of 25% equity. He can apply for "permission to let", but I'm not even sure if a lender would say yes to this.

Would surrendering the property then filing for bankruptcy when the debt figure is settled, be an option for him? It may seem drastic but it could be the only realistic option unless he can magic up £70k in the foreseeable future.

You can sell a house in negative equity if you can pay the lender the shortfall by getting money in another way eg get a loan, borrow from family. But you can't sell and still owe lender money. I did this but the figures were much smaller 20 years ago although proportionate to my income it was a lot to me and I had to take extra jobs evenings and weekends to repay the loan. But OP you need to understand the situation and it sounds like he's not being honest with you or facing up to it himself. He may feel foolish

Going from 170k -> 100k means the house has lost over 40% of its value. He either massively overpaid or he is not being totally straight with you.

Lottie, what would be the reasons for the lender refusing to let him rent? Surely it's better for them as it helps him make the repayments? We'd love to surrender the property, but then we'd run the risk of losing my house too (where we live). Bankruptcy seems wrong, since we can actually afford the repayments. Also, it would affect us getting a mortgage in the future, wouldn't it?

I think he massively overpaid for the house, Not. He bought the month before it all collapsed. I think you're right, mill, about him feeling foolish. He's very reluctant to let me have access to his financial matters, and I think that's the reason. But he's burying his head in the sand, and he can't go on doing that.

I'm fairly good with money once I understand it - I'm not clued up on how mortgages work because I've never had one, but one I figure out the terminology etc I'd be happy to talk to the bank and look at options, and then stick to a budget. DH isn't a big spender, but has said before that he doesn't like the idea of having to stick to a budget.

He grew up in a well-off family, so isn't used to managing money well. I grew up in a family with next to nothing, so am used to not having much. It's frustrating, though, that the house I have is really everything that my grandparents and parents scrimped and saved for, and now we might have to use it to get out of a stupid debt of DH's.