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England

Voluntary sale of a home to avoid repossession

Options and consequences for borrowers considering a voluntary sale after repossession, which is preferable for many borrowers facing an enforced sale.

This content applies to England & Wales

When a borrower hands over keys to their lender

In most circumstances, it is not advisable for a borrower to hand over the keys before the lender has obtained an enforceable possession order. The borrower remains liable for the debt, which continues to increase until the property is sold.

For a borrower's sale during possession proceedings see Selling the home before eviction.

Help with housing costs maybe be available through Support for mortgage interest.

If a borrower who has handed over the keys prematurely tries to apply to the local authority as homeless person, it is likely they will be found intentionally homeless, unless they can prove that it was reasonable for them to do so.

Assisted voluntary sales

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

The FCA Mortgage Conduct of Business Rules confirm that a lender should consider whether it is appropriate to allow a borrower to remain in possession for a reasonable period to effect a sale.[1] The borrower can complain to the lender and the Financial Ombudsman Service if the lender fails to follow FCA rules.

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.

Sale of a property that is in negative equity

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'.

The lender normally want confirmation that the borrower is unable to meet even the interest payments on the loan and that a voluntary sale would be the best option.

Forcing the sale in the courts

If the lender refuses to allow the property to be sold, the borrower can issue a claim in 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 claim is issued under Part 8 CPR on form N208. 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 their children.[3] The legal costs of applying for an order for sale can be significant.

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, they need to be able to demonstrate that their course of action was reasonable under the circumstances otherwise they may be found intentionally homeless.

Case law has established that where an applicant cannot pay the mortgage without depriving themselves or their family of basic necessities, and repossession is inevitable, then it may not be reasonable for them to remain in the accommodation.[4]

Last updated: 10 September 2021

Footnotes

  • [1]

    MCOB 13.2.3A(5).

  • [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.