What is a mortgage shortfall?
A mortgage shortfall occurs when a property is sold for less than what is owed on the mortgage and/or any other loans secured on it.
For example, if a property sells for £200,000 but its outstanding mortgage is £240,000, the mortgage shortfall would be £40,000. You would be liable for ensuring the monthly mortgage repayments are met (including capital and interest) until the property is sold, plus any costs for repairs, maintenance and insurance.
Seeking mortgage shortfall advice and finding out more about your next move are important steps to getting your finances in order as soon as possible.
Selling the property
If your lender has repossessed your property, or you have handed back the keys, then the full extent of your liabilities will often be unclear until the property is sold.
Your lender will sell your property and they will have a duty of care to sell it for the best possible price and keep any potential losses to a minimum. They may decide to rent out the property prior to the sale in order to get some extra income (this will be offset against what you owe them following the sale).
What happens after my property is sold?
Once they have sold the property, your lender will deduct what you owe them from the proceeds, along with any costs for maintenance to the property, solicitors and estate agent fees.
Your lender will also use the proceeds to repay what you owe to any other lenders with loans secured on the property after they’ve used the funds to clear their mortgage balance. The proceeds are used in a specific way – arrears of interest are paid off first, followed by outstanding capital.
If there is any money left, this will be refunded to you. However, in some cases, there won’t be enough money to repay everything you owe. In the case of a ‘shortfall’, you are liable to repay this amount.
Am I liable for the shortfall?
If there is a shortfall, your lender has the power to pursue you for the shortfall amount by applying to the court for a County Court Judgment. Once the property has sold, the shortfall debt becomes an unsecured debt – one which is now no longer a priority debt. This means it is no different to any money you may owe to a credit card, catalogue, or overdraft etc.
If your lender intends to pursue you for the shortfall amount, they must take action to recover the debt within a specified period of time. They will have 6 years to recover arrears of interest – the interest you were charged for borrowing the money. They will have 12 years to recover the capital amount – the money you originally borrowed.
The time limit recovery of the interest starts when the interest becomes due for payment.
The time limit for recovery of the capital starts when the lender was entitled to be paid in full, which is usually after two or three missed monthly mortgage payments.
As a concession, the lender may have agreed not to pursue the debt unless the client is contacted within six years from the date the property was sold if:
- The lender was a member of the Council of Mortgage Lenders (CML) or subscribed to the old mortgage code, and
- No contact about the shortfall was made by the lender with you before the 11th February 2000 . Contact includes letters or phone calls received, but ignored by you. Contact does not include letters sent to a previous address (unless they have been forwarded) and does not include failed attempts to trace you.
What happens if I am liable for the shortfall?
If you are liable for the shortfall, there are several ways in which you may be able to deal with this:
- Make a repayment agreement – contact your lender, and offer them a reasonable monthly repayment amount based on what you can afford after your essential monthly bills and living costs have been taken care of.
- Offer a settlement lump sum – if you have little or no assets but you can get hold of a lump sum to offer your lender, they may be willing to accept a one-off lump sum payment of less than the full amount you owe, and write off the remaining outstanding balance. In this case, always make sure you get confirmation in writing from your lender that they have accepted this lump sum in a ‘full and final settlement’.
- Ask the lender to write it off – if your circumstances are especially severe with no chance of improvement, some lenders may consider writing off the shortfall completely. This is unusual, but if you think your case is particularly extreme you should contact your lender and explain your situation.
- Go bankrupt – in some cases, if you owe at least £5000, bankruptcy may be the only option. If you apply for bankruptcy, the outstanding debt would be written off after the period of bankruptcy – normally 12 months. Bankruptcy is a serious decision, and you should always seek further advice before considering this. Your lender is unlikely to petition for your bankruptcy unless they think you have assets that would make it worthwhile for them.
If you’d like further help about your mortgage shortfall options, please contact our Advice Team on 0800 917 7819 or get free debt advice online.