Dealing with a mortgage shortfall
A mortgage shortfall can happen when your home has been repossessed and sold, and the money raised isn’t enough to pay your outstanding mortgage and any secured loans as well as legal and estate agents’ fees.
If your property has been repossessed, your lender will try to get the best price and then take what is owed to them plus any costs for solicitors or estate agents. Sometimes the debt includes the monthly instalments and interest added while your home is being sold.
Once sold, they will then repay any other lenders who have loans secured on the property. Sometimes, there isn’t enough money to pay everything. This difference is known as a mortgage shortfall – and you may be liable for this amount.
In most cases, you can treat mortgage shortfalls as non-priority debts. You cannot usually go to prison, be evicted from your home or lose an essential service as a result of not paying non-priority debts.
Am I liable for a mortgage shortfall?
First of all, check your records. Find out how much time has gone by since you last made a payment or acknowledged your debt as this could affect the action you take, and identify where the shortfall occurs.
If you owe mortgage capital
Mortgage capital is the amount of money you originally borrowed. Your lender has up to 12 years to pursue you for payment.
If you owe interest
Mortgage interest is the interest you were charged to borrow the money. Your lender has six years to take action to make you pay. In practice, although most lenders have up to 12 years to contact you and ask for payment, most will do so within the first six years.
If you owe capital from more than 12 years ago, you may not be liable as the debt may not be enforceable under the Limitations Act 1980. This Act outlines the rules on the length of time your lenders have available to take action against you to recover debts. If they run out of time, your debt is ‘statute-barred’.
Find out if this is the case by checking your credit report, which will show you any outstanding debt. It’s also worth looking back at your bank statements to see when you last made a payment towards the debt. You don’t need to take any further action if you’re certain your debt is now statute barred.
Many lenders have a policy of not taking further action after the first six years. This is why you need to know the time frame. It might be when the money was first owed – perhaps when you were first in arrears with your mortgage and your lender took action to recover the debt – or it could be the last time any payment no matter how small was made.
I didn’t receive notification of my mortgage shortfall
If you haven’t received a full breakdown of the mortgage shortfall from your lender, you could ask them to send you all the information they hold about your mortgage account. Making this request is free under the Data Protection Act 2018.
You may be able to complain to the Financial Ombudsman Service (FOS) if your lender didn’t write to you within six years of the sale to confirm the mortgage shortfall. Ask your lender for a copy of their complaints policy and take this route before contacting the FOS.
Should I negotiate with my lender?
Depending on your circumstances, you have a few options:
Contact your lender, explain your situation and make them a reasonable offer of repayment on a monthly basis. If you’re not sure about what you can afford, we can help you work this out.
If you’re in a position to do so, you could offer a lump sum. If your lenders consider this reasonable – and think they are unlikely to receive more by pursuing the debt further – they may accept a one off payment in full and final settlement.
If regular payments are unrealistic, bankruptcy may be the only option. After the 12-month period, your debt would be written off. We recommend taking further advice if you’re considering this as a solution. You could also consider an Individual Voluntary Arrangement (IVA), Debt Management Plan (DMP and a Debt Relief Order (DRO) as other ways to resolve your debt.
If you are experiencing difficulties, such as illness or disability, with very limited income and a large mortgage shortfall debt, it’s worth asking your lender not to pursue the debt.