Court ruling gives relief from negative equity

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The Independent Online
Homeowners struggling with mountains of mortgage debt were given a small ray of hope by the High Court yesterday, when it ruled that a property can be sold without them also having to meet the cost of doing so.

The judgment will affect up to 1.5 million borrowers living with the millstone of negative equity - where their mortgage is greater than the value of the property - round their necks.

Thanks to an earlier landmark judgment, Palk v Mortgage Funding Services, they already have the right to sell their home on the open market rather than have it done for them. But the 1993 ruling still meant that a lender had the right to insist on receiving the property's full sale price, with all other costs being met by the vendors themselves.

In practice, this meant that unless sellers could come up with this extra cash, they were condemned to turn down offers on their property. In a falling housing market, this ensured that the next offer would be less than the first and so on. In turn, this increased the amount of total debt owed to the lender.

Many societies already recognise such a tactic often does not benefit the lender. John Wriglesworth, a senior manager with Bradford & Bingley Building Society, said yesterday: "We have agreed in the past to the sale of a property without the vendor having to find the extra money for fees. There's not much point in sticking to the letter of the law if by doing so you reduce the amount that might be obtained from selling the house right away."

By allowing Edward and Doreen Barrett not to have to find this extra money, the High Court has accepted the de facto reality of their position. It has also reduced slightly the amount that might be paid out to lenders from mortgage indemnity policies, which insure them when a home is sold for less than the amount lent on it.

Ian Darby, a director at John Charcol, a firm of mortgage brokers, said: "For an insurer to agree to pay out on a mortgage indemnity policy, it must be satisfied that the lender has obtained a fair and reasonable price and minimised any losses. This might not be possible in such circumstances."

However, the amount lost by the lender, the conveyancing cost, is likely to be no more than a few hundred pounds on a mortgage of pounds 50,000.