Q&A: Dominic Coyle – When a former partner wants out of a mortgage

My son and his partner bought a house in 2005 for €200,000 on a 100 per cent mortgage. Unfortunately, they split up a few years later. As a result, the house was rented out. They put the money received in rent towards paying the mortgage. As the rent does not meet the mortgage bill, they have each been paying additional money every month.

Both of them have since moved abroad and settled down separately. Recently, my son’s former partner has suggested she would like to sort out the mortgage and move on.

The question is how best to do this fairly and equitably? The property is currently in negative equity.

Mr CM, Galway

This was an increasingly common scenario, at least in the days before the Central Bank introduced tighter mortgage lending rules. Certainly back in the Celtic Tiger years, with banks all too ready to lend 100 per cent and more of the value of a property, it was very common for couples to buy homes together only to find subsequently that the relationship didn't last.

As long as the market was rising, there was little problem but a considerable number of people now find themselves in the position of your son: he and his former partner are saddled with a property worth less than they paid for it and a mortgage that doesn’t cover the mortgage and other costs.

Given the trend back then, I am assuming the mortgage is for a 25-30 year period which means they both face a financial commitment back home for another 15-20 years from now, assuming they do nothing.

As such, it is understandable that one or other, or both would look to sort something out.

Essentially there are two choices. Either one party buys out the other – in this case, given the views of your son’s former partner, we are talking about he assuming full control of the property – or they sell the property and pay back the mortgage loan.

The position of the bank is simple – it wants its money back. With a clean 10-year repayment record on the mortgage – which I assume the owners have – the bank is likely to be open to working towards a solution.

If the mortgage rate is fixed, that is more difficult and could increase the costs involved.

One issue that may arise is if the negative equity is such that the outstanding mortgage is greater than the current value of the home. That means that even if the property is sold, both parties face a potentially sizeable bill to cover the difference between the sale price and the value of the outstanding mortgage.

On top of that, of course, there would be selling costs, including legal and estate agents’ fees, which would most likely be divided equally.

It is always possible that either of the owners does not have the funds available to fund the gap between the selling price and the outstanding value of the loan, even if they do want to sell up and have done with the thing. This would mitigate against selling the home just now.

If they decide on the alternative – that one person buys out the other, negative equity is also a key factor. What price do they agree? If the “selling” partner is prepared to pay only the current market value, the “buyer”, your son will assume responsibility for the full loan and any associated costs – including a new life policy.

Unless he has a very strong belief in the potential of the property value to rise substantially in the future, that seems a rash move, even assuming he can afford it.

The mortgage rules imposed by the Central Bank do not apply either to switcher mortgages or to buy-to-lets (which is what your son’s former home is now considered). However, banks are more cautious about lending and it is most unlikely your son would get a loan of more than 90 per cent of the current value of the home. For buy-to-lets, the limits are often even tighter.

Clearly, from your son’s point of view, a fairer position is that his former partner agrees to pay half the outstanding mortgage. Even then, your son is still facing additional costs for the full future burden for maintenance and other costs and he needs to consider whether he can afford this and/or wants to.

I would suggest, given that it is your son’s former partner who wants to exit the current arrangement, at the very least they need to offer half the outstanding loan cost and half any remortgaging costs involved. That is only fair.

Yes your son would stand to benefit from any future uplift but he also stands exposed for the full value of the loan, and to any further loss of value as well as any running costs associated with the property – an investment property in which he never proactively planned on investing.

The bottom line is that if the two sides cannot agree a fair exit strategy, the status quo remains.

As that appears to suit your son, I see no reason why he should be conceding ground on the financial arrangements to his own financial detriment . . . there's fair and then there's stupid. Tax on selling Verizon shares In relation to the sale of Verizon shares, what will the tax position be? Will it be the same as with the Vodafone deal?

Mr TO'N, email

Tax issues on some of the dealings in Vodafone/Eircom/Verizon shares have been complicated by the nature of the return of value exercise through which some money was returned to shareholders on the last occasion.

The good news – at least for the sake of clarity – is that there is no such room for confusion on this occasion. The sale of Verizon shares, assuming you and other investors choose to avail of the low cost option currently on offer, will be subject to capital gains tax.

Given the relatively small holdings of many of those people involved, tax is not likely to be an issue.

You must subtract the original price at which you “acquired” the Verizon shares from the sale price, and then further discount any costs incurred in their sale. Only then, if the gain on the transaction is greater than €1,270 will you face a capital gains tax liability at 33 per cent.

Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.