In this brief guide, we are going to discuss what a mortgage shortfall is and what you can do about it.

What is a mortgage shortfall?

A mortgage shortfall is when you sell your home but the proceeds from the sale are not sufficient to cover your outstanding mortgage balance or any other secured loans on your property. The money you still owe is known as a mortgage shortfall.

You can also have a mortgage shortfall when you sell your home gets repossessed but the sle price was less than the outstanding mortgage balance on your mortgage.

You will still be responsible for paying your monthly mortgage repayments until your home has been sold and if you are unable to keep up the monthly mortgage repayments then you could quickly build up a mortgage shortfall.

During a home repossession you will not only be responsible for the monthly mortgage repayment, it will still be your responsibility to ensure the home is still insured and properly maintained.

The mortgage lender has a duty of care to ensure your home is sold at the very best price and keep any losses to a very minimum.

This means they should consider options such as  renting the property out to gain extra income which they could use to offset the mortgage balance which you owe.

If your home has been repossessed then the mortgage lender will do their best to sell it. Once it has been sold the mortgage lender will subtract an  estate agent fee costs and other costs associated wit the transaction such as conveyancing fees. 

The mortgage lender will also pay any other secured lenders who have an outstanding loan secured on your property.

They will then subtract the mortgage balance which you owe to them.  After this point if there is any surplus then they will pay this to you. If there is a shortfall and the proceeds from the sale cannot pay off the mortgage balance in full then this is a mortgage shortfall and you may be liable for this. 

Example of a mortgage shortfall

If your property is worth £500,000

Your home is repossessed and sold for £450,000

The cost of selling your home is £2,000

The outstanding mortgage on your home is £480,000

You have no other secured loans on your property

With the above, you will have a mortgage shortfall of £32,000.

The mortgage shortfall timeline.

The mortgage lender could come after you for the mortgage shortfall. They can apply for a county court judgement or other enforcement action from the courts.

These will allow the lender to enforce any judgement which was granted at the time of the home repossession order.

The mortgage lender can demand you pay this mortgage shortfall but they do have certain time limits in which they can make this demand.

If the mortgage shortfall includes the capital element of the mortgage then the mortgage lender has up to 12 years to pursue this claim.

If the mortgage shortfall does not include any capital owed on the mortgage but includes other costs such as interest charged on the mortgage then the mortgage lender has a time limit of six years. This is due to the limitations act. 

Most mortgage lenders will contact you within the first 6 years, regardless of if they have a 12-year limit or not.

As of quite recently, most mortgage lenders agreed on a policy of not taking further action after the first 6 years have elapsed.

For you to know where you stand in regards to being asked to repay a mortgage shortfall, it is important you understand when the time limit begins.

The time limit could be:

  • The first time the mortgage lender took action to recover the debt
  • The last time you acknowledge that you owe the debt- this will usually have to be in writing and any offer to pay off some of the debt would count as an acknowledgement of the debt.
  • Or the last time you made a payment to the mortgage lender

With the above being said it is important to know what the time limit is and avoid making any acknowledgements that you owe the debt to the mortgage lender.

It may turn out that you are no longer liable for the mortgage shortfall.

On the other hand, if you realise that you are liable for the mortgage shortfall then there are a few things you can do to come to an agreement with the mortgage lender.

Reaching an agreement with the mortgage lender.

  • You should contact your mortgage lender and see if they are willing to come to an agreement
  • Make them an offer which you think you can keep to by making monthly repayments each month
  • You should also offer a lump sum payment at the end of the monthly repayments
  • If the mortgage lender feels this is a good offer then they will let you know. In most cases, the mortgage lender will usually agree if they feel like chasing you for further funds will not result in an increase in the funds they receive.
  • You must check that the mortgage lender has accepted this amount as the “full and final settlement”. You must get this in writing.

In some cases, if your personal circumstances are so bad that you cannot afford to repay the mortgage shortfall then you should let the mortgage lender know and ask them if they will consider writing off the mortgage shortfall.

Some mortgage lenders will consider this and write off the mortgage shortfall.

If they don’t then you may be able to consider other options such as bankruptcy but you should seek independent financial advice for this.

12 months after bankruptcy the debt will be written off but you should consider how bankruptcy could affect your ability to get credit in the future.

You should seek independent legal and financial advice before doing this.

Other things to consider

Possessions Register

If you have a home repossession then your name will be added to the possession register and remain there for 6 years.

Lenders will be able to assess this register and it may affect your ability to get credit in the future.

You can read more about home repossessions in the UK here.

Mortgage Indemnity Guarantee Policies

You may have paid for a mortgage indemnity guarantee Policy for your mortgage lender.  This policy allows the mortgage lender to claim any shortfall from the insurance company but then the insurance company may be able to come after you for the shortfall.

FAQs: Mortgage shortfall

What is a shortfall payment?

TheFCA handbook defined a mortgage shortfall as as: ‘the total sum of periodic payments of capital or interest (or both) that have become due under the terms of a regulated mortgage contract but which, in breach of those terms, remains unpaid”

How long can a mortgage company chase you for debt?

Depending on the circumstances a mortgage company can chase you for 6 years or 12 years for any mortgage debt.

How long does a house repossession affect your credit?

six years. A house repossession will stay on your credit file for at least 6 years. This means it may affect your ability to get credit in the future.

How long before a mortgage shortfall debt is written off?

It could be 6 years or 12 years based on your circumstances. These are terms set out in the limitations act.

In this brief guide, we are going to discuss what a mortgage shortfall is and what you can do about it.

If you have any questions or comments please let us know.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.