Voluntary sale

If the lender obtains possession and sells the property it is likely that, at best, the home will sell for only 85 to 90 percent of the price that the borrower might have obtained. The situation could be worse still if the condition of the property deteriorates as a result of vandalism or severe weather.

If the lender obtains possession and sells the property it is also the lender who decides how a property is to be marketed and when an offer should be accepted. In the meantime, the mortgage debt continues to increase as no payments are being made to the account. The lender has a duty to advertise the sale and 'take all reasonable steps to ensure that the price... is the best that can reasonably be obtained'. [1] It can be extremely difficult to prove negligence when the lender has handed over responsibility for the sale to a professional property agent. [2]

It is therefore preferable to pursue the voluntary sale of the property if possession proceedings and an enforced sale are otherwise inevitable. Borrowers should also be advised of the mortgage to rent scheme.

In a few cases a house may be sold at auction (known as 'roup' in Scotland). The price obtained at auction is likely to be much lower than in a normal sale and it is therefore preferable to avoid the house being sold in this manner.

The lender's written authority is required if a sale is to proceed without the loan being repaid in full. To persuade the lender of the merits of the voluntary sale, the borrower should draw the lender's attention 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.

Lenders in Scotland will be reluctant to agree to sale where the loan is not paid in full.

If the borrower's deposit was less than 25 percent 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. In effect, it gives no protection to the borrower, although it may allow her/him to receive a higher loan than would otherwise have been allowed. Once the insurance company has paid out on a mortgage indemnity claim, it is 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. In practice, the lender normally tries to recover the shortfall on behalf of itself and the insurance company.

Although borrowers may not know the size of the indemnity it is easy to calculate by comparing the amount borrowed with the value of the property at the time the mortgage was taken out. The indemnity will normally be the difference between the amount borrowed and 75 percent of the value of the property. Occasionally, it will relate to loans of more than 80 percent.

For example, a loan of £66,500 obtained to purchase a home worth £70,000 would require a mortgage indemnity amounting to £14,000. This is because £52,500 is 75 percent of the total home value, and the difference between the loan amount of £66,500 and £52,500 is £14,000.

The lender can normally claim against the policy only if the property is repossessed or the borrower returns 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.

Borrowers should always ask for permission to sell the property even if there is a mortgage indemnity in existence as 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 actually save the insurer money by keeping the claim to a minimum.

If a borrower applies to the local authority as a homeless person after a voluntary sale s/he will need to be able to demonstrate that her/his course of action is reasonable under the circumstances, otherwise s/he may be regarded as intentionally homeless. 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 her/him to remain in the accommodation. [3] In such a case homelessness should not be deemed to be intentional. [4]