What is a Mortgage Shortfall?

A mortgage shortfall can be a worrying thing to encounter for any homeowner. A mortgage shortfall occurs when the sale of your old home doesn’t cover the remaining balance on its mortgage. Often, it stems from you selling your house and not raising enough cash to cover the mortgage. Other times, it may arise from your home being repossessed and you finding that money is still owed on it (despite the lender successfully selling it).

Either way, it’s not a pleasant experience and could result in financial penalties, a damaged credit score and even difficulty in securing a mortgage in future. Should you be worried that you’ll end up in a mortgage shortfall, or already are, read on.

Can I work out my mortgage shortfall?

Yes – your lender will almost certainly reach out to you detailing what is owed. If they don’t, they will pass the information to a debt agency that will pursue you on their behalf.

Their documents will show what you owe, but this can sometimes be incorrect, or at least a little confusing.

For a clearer understanding of how much is owed, take the amount the house sells for and subtract it from your mortgage balance. If that figure is negative, you are in a mortgage shortfall.

If the figure doesn’t match what the lender is claiming, you should factor in any interest and monthly payments that would have accrued during the sale of the home.

It is also worth noting that if your home is being sold by the lender as part of a repossession order, legal costs and estate agent fees may also be added to the debt.

What causes a mortgage shortfall?

Mortgage shortfalls can arise for a host of reasons, and not always at the fault of the homeowner.

Repossession

If you have fallen behind on mortgage payments and now face repossession, your house could be taken from you. This will result in it being sold to help recoup the lender's cash, but occasionally, the sale doesn’t raise enough to cover the debt. This is when you enter a mortgage shortfall and will be contacted by the lender or a debt agency to settle the debt.

You sell the house too cheap

You might be desperate to sell your house fast, and end up accepting an offer for much less than originally expected. This will likely put you in a shortfall and see you having to formulate a plan to settle the debt.

Volatile housing market

If house prices are moving up and down a little too often, you could find that your home is worth less than when you bought it. This means any sale is likely to recoup a smaller amount of cash than if you sold at a better time. As a result, you’ll owe money even after the house has sold. For example, if you:

• Buy a house for £250,000
• Pay 10% deposit of £25,000
• Have a mortgage of £225,000
• Make mortgage payments of £10,000
• Sell the house for £195,000

You will have a £20,000 shortfall.

How long can I be chased for a mortgage shortfall?

Lenders and debt collectors sometimes chase debts vigorously, but they must follow certain rules and time limits. This sometimes means the debt can be written off. However, before you wonder if you’ve been let off, it’s worth explaining how this works.

The Limitation Act 1980 sets out rules for how long a creditor has to take action to recover a debt. Should a lender not take certain actions within a given period, the debt becomes statute-barred. However, different limitations apply to different debts.

Mortgage capital debt

If you still owe money from the original amount borrowed (not the interest), a lender has twelve years to take court action in order to make you pay.

Interest-only debt

In cases where you owe interest on the mortgage, a lender can take up to six years to use the courts to enforce payment.

In most cases, you’ll owe mortgage capital debt after the house has been sold. This is because lenders clear the interest amount first with the money they receive from the sale. Should the sale cover the interest and leave only some capital to pay, your mortgage shortfall will purely be capital.

When does the Limitation Act come into effect?

This will depend on whether you owe capital or interest. Should the mortgage shortfall be capital only, this period can begin after just two or three missed mortgage payments.

When it comes to an interest mortgage shortfall, the six-year period begins when the interest is due for payment.

However, the time limit can be restarted in one of two ways.

Making payments

If you make payments within the 12-year limitation period, the time limit will start over. This will only affect any capital outstanding rather than the interest.

Making an acknowledgement

If you write to the lender accepting that the debt is yours, the period of 6 or 12 years will start again. This only applies to homes where the debt is registered with one person and not with joint owners.

How to pay off mortgage shortfall

If you have received letters from the lender or debt agency explaining your mortgage shortfall, be sure to check it first.

Before making any payments, ensure that what you are being asked to pay is accurate. If it is, work with the lender to organise a payment plan. Luckily, lenders are quite open to affordable payment plans. They simply want their money back, and if any effort is made to give it back, they’ll generally welcome it.

The payment plan will be set over a period of years, with monthly payments calculated to cover the outstanding debt. If you can pay off any lump sums, in between scheduled payments, make these payments – you’ll reduce your debt quicker and be in a better position to improve your credit score.

All agreements between you and the lender must be in writing with a clear start date and end date.

How can I avoid a mortgage shortfall?

Mortgage shortfall can be worrying, but it can be avoided.

Only sell when the time is right

The property market can fluctuate quite quickly, but normally the value of property rises rather than falls. This means that you might be best waiting a little longer to sell if you’ve noticed a sudden drop in value. This could mean your home regains some value, you increase your equity, and you benefit from selling at a higher price that helps you avoid any shortfall.

Save a larger deposit before you buy

The bigger the deposit, the smaller the mortgage. The smaller the mortgage, the less you’ll owe. With less to owe, any shortfall will either be hopefully non-existent or, at worst, minimal.

Work out any potential shortfall before you sell

Assess the local market, secure a value for your property and look at how much you owe. This will give you a rough idea of how much shortfall you may encounter. The lower the shortfall, the easier it may be to manage.

Can I apply for another mortgage when I have a mortgage shortfall?

Most lenders want to see that you have cleared your existing shortfall before you secure a new mortgage. If it is fully cleared, you might find interest rates are a little higher as you present more risk, but this isn’t always the case.

Should you have been unable to clear a mortgage shortfall, a lender will probably steer clear of lending. They might also consider this if you are still paying a shortfall back, the fear being that trying to keep up two payments might result in them missing out on receiving theirs.

If you have started to struggle with your mortgage and are worried about falling into debt, we can ensure your house sells, allowing you to clear your outstanding mortgage or at least make a significant dent in it. Our two routes to sale give you total flexibility, whilst guaranteeing that your home will be sold. We’ll either buy it ourselves or present it to a team of cash house buyers. In addition, with no fees, you sell your house for free, allowing you to keep more of the sales cash for your mortgage debt or to go towards your new home. Contact the Bettermove team today.