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Voluntary sale

This content applies to England & Wales

Options and consequences for borrowers considering a voluntary sale after repossession.

Lender obtains possession

If the lender obtains possession and sells the property, it is likely that it will sell for less than the price that the borrower might have obtained on the open market even though a lender must take steps to sell the property as soon as possible and obtain a reasonable price.[1] The situation could be exacerbated if the condition of the property deteriorates as a result of vandalism or severe weather while it is empty and awaiting sale. If the lender opts to sell the property at auction, it could attract far less than what the borrower would hope to obtain on the open market.

Where the lender is in possession, it will also decide how a property is to be marketed and when an offer should be accepted. In the meantime, the mortgage debt continues to increase because no payments are being made on the account. Although the lender has a duty of care to obtain the current market value of the property, it can be extremely difficult to prove negligence when the lender has handed over responsibility for the sale to a professional property agent or auctioneer.

If possession proceedings and an enforced sale are otherwise inevitable, it is therefore preferable for most borrowers to pursue the voluntary sale of the property. This is the case even where the amount obtained on sale is not likely to cover the total amount of the capital sum borrowed and the arrears (see 'selling at a loss', below).

Selling at a loss

The lender's written authority to sell is required if the proceeds of a sale will not be sufficient to pay off the outstanding debt to the lender. This is referred to as 'negative equity'. In these cases, it will be necessary to satisfy the lender that the borrower is unable to meet even the interest payments on the loan and that a voluntary sale would be the best option. To persuade the lender of the merits of the voluntary sale, the lender's attention should be drawn to the much larger losses that are likely to be incurred as a consequence of an enforced sale. This may be more difficult if there is mortgage indemnity insurance, because the insurance will guarantee that the lender is covered for most losses (see 'mortgage indemnity insurance', below).

If the lender refuses to allow the property to be sold, the borrower can apply to the county court for an 'order for sale' under section 91 of the Law of Property Act 1925 (for sole owners) or section 14 of the Trusts of Land and Appointment of Trustees Act 1996 (for joint owners). The court has wide discretion over whether to make an order for sale, and if so, on what terms. The county court can make an order for sale if there is negative equity, taking into account the interests of all concerned and with regard to what is just and equitable.[2] This can include taking account of social factors, such as the borrower wanting to move to improve job prospects and obtain better schooling for her/his children.[3] However, the borrower should first be advised that this would incur extra costs, which could be significant.

Assisted voluntary sales

Assisted voluntary sale (AVS) is an option some lenders offer to assist homeowners in financial difficulty to exit from homeownership and plan for a move into alternative accommodation.

The range of support on offer from the lender might include:

  • allowing the homeowner  time to sell (usually between 3 to 12 months)
  • agreeing to reduced monthly  mortgage payments while the property is marketed
  • reimbursing solicitor and/or estate agent’s fees
  • the services of an asset manager to help to progress the sale
  • providing a deposit and or rent in advance for private rented accommodation.

A lender may require certain criteria to be met before they would consider AVS:

  • there are mortgage arrears
  • all other options have been exhausted
  • the homeowner must agree to, and fully co-operate with, the sale (this might exclude arrears cases prompted by relationship breakdown)
  • there is negative equity
  • there are no second charges secured on the property.

Some lenders may consider AVS before arrears arise if it is apparent that the mortgage is no longer affordable.

Further information about AVS is available in the National Homelessness Advice Service Guide How to exit homeownership through a voluntary or assisted voluntary sale (AVS).

Mortgage indemnity insurance

If the borrower's deposit was less than a certain percentage of the value of the property, it is likely that the lender would have required mortgage indemnity insurance. This type of insurance is arranged between the lender and the insurance company at the start of the mortgage, but is paid for by the borrower in a single premium. The purpose of the policy is to indemnify the lender against losses up to a certain limit in the event of the property being repossessed.

The mortgage indemnity is important for a number of reasons:

  • the lender can normally only claim against the policy if the property is repossessed or the borrower hands in the keys
  • many lenders have still not managed to reach agreement with their mortgage indemnity insurers over the voluntary sale of properties that would otherwise be repossessed with even greater losses. This has led to some lenders refusing to allow homes to be sold where there is likely to be a shortfall that might otherwise have been met by the indemnity
  • the policy insures the lender, not the borrower. The insurance company is therefore entitled to pursue the borrower for any money that it has had to pay to the lender as a result of a claim on the policy.

Borrowers should always ask for permission to sell the property even if there is a mortgage indemnity in existence because some lenders can claim on a policy if voluntary sale is seen to be the most favourable outcome, for example, if possession and an enforced sale were inevitable and it was clear that the lender's losses would greatly exceed the sum covered by the indemnity. At the other end of the spectrum, a voluntary sale might save the insurer money by keeping the claim to a minimum.

Homelessness after a voluntary sale

If a borrower applies as homeless after a voluntary sale, s/he will need to be able to demonstrate that her/his course of action was reasonable under the circumstances otherwise s/he may be found intentionally homeless (see the section on Intentional homelessness for more information). Case law has established that where an applicant cannot pay the mortgage without depriving her/himself or her/his family of basic necessities, and repossession is inevitable, then it may not be reasonable for them to remain in the accommodation.[4]

[1] Mortgage Conduct of Business (MCOB) rule 13.6, Financial Conduct Agency.

[2] Palk v Mortgage Funding Services [1993] 2 All England Reports 481, CA.

[3] Polonski v Lloyds Bank Mortgage Ltd (1997) The Times, ChD.

[4] R v Hillingdon LBC ex parte Tinn (1988) 20 HLR 305, QBD.

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