What is a Mortgage Shortfall?

A mortgage is often crucial when buying a house.

It’s essential that you choose a product you can pay back.

Unfortunately, problems with mortgages do happen. A mortgage shortfall is an example of this.

Keep reading to find out what a mortgage shortfall is.

What is a mortgage shortfall?

A mortgage shortfall is when you still owe money on your mortgage after the sale of your house.

This typically happens because your property value has declined. There are other reasons too, which we’ve explained further below.

When this happens, your mortgage lender will usually contact you to find out how you plan to repay them.

This might involve agreeing on a payment plan or giving you a deadline to pay everything back. Some organisations are more lenient than others.

If you fail to pay the mortgage shortfall, the lender can take legal action. They usually have up to 12 years to recover the debt.

And they must tell you that they plan to do so within 6 years of your house sale.

Remember that a court may also make a ‘money judgment’ if your house is being repossessed.

What causes mortgage shortfalls?

A mortgage shortfall happens when you sell your property for less than the mortgage that’s left to pay off.

You thus owe your lender the difference – known as a ‘shortfall’. There are several reasons this may happen.

Economic downturn

A significant economic downturn is a common explanation.

If your property value has decreased by tens of thousands, it can put you in a shortfall when the time arrives to sell.

This is especially common with retirement properties or new build houses, which can have fluctuations in price.

House repossession

House repossessions are another common scenario.

You may be forced to sell your property at an auction when this happens.

This almost always results in a far lower selling price than you would get on the open market.

Selling to a cash buying company

Any other method of selling your house below its typical value can create a shortfall.

Using a cash buying company is one example. Or selling privately to a friend or family member is another.

How common are mortgage shortfalls?

Mortgage shortfalls are relatively common. Thousands of people across the UK find themselves in this position every year.

A significant drop in the UK housing market is rare. So, except for one-off incidents (such as the 2008 crash), you probably won’t get a shortfall because of this.

The main exceptions are retirement properties and new builds.

But shortfalls are widespread when your house gets repossessed.

It also happens when you can’t sell on the open market, and thus need to use an auction house or cash buying company.

A few things that could prompt this, including:

And more.

What are my options when I have a mortgage shortfall?

Your lender will typically contact you to discuss repayment. You have a few main options.

Pay it off in one lump sum

Firstly, you can pay the entire shortfall in one lump sum. This is only possible if you have the money necessary.

You could ask for a period to gather all the money necessary. Whether this is permitted depends on the lender.

Regular installments

A second option is to pay it back in regular installments. This is also known as a ‘payment plan’ and can sometimes be covered over several years.

You should double check that you can afford these regular payments.

Ask to write off the debt

Sometimes, you could ask your lender to write off the mortgage debt. However, it’s unlikely that they’ll agree to this.

It’s more likely that they’ll write off some of the debt, but not all of it.

Declare bankruptcy

A fourth and final option is to declare bankruptcy.

This should only be a last resort after you’ve spoken to an independent, qualified financial adviser. If you can avoid this then it’s certainly worth trying to.

Common complaints about mortgage shortfalls

If you’re contacted by a lender about a mortgage shortfall, you should double check that their claims are accurate. A legal or financial expert can help with this.

You may think that you’re not solely responsible for paying back the shortfall.

Perhaps only your name has been written on a letter, but you shared the mortgage with an ex-partner.

It could also be that you dispute the precise amount of the shortfall.

You can dispute this in a court of law or contact the lender directly with some legal guidance.

It may also be that it’s been a long time since your house was sold – so you haven’t been saving up for this.

Being asked to pay back the entire sum immediately can seem unfair if you don’t have the funds and have been uncontacted for several years.

Tips to avoid a mortgage shortfall

Be cautious before choosing a mortgage

You should always ensure that you can afford your mortgage repayments.

This requires caution when you first take out the loan. You’re thus less likely to fall into arrears and get your house repossessed.

If you dispute your lender’s claim about a shortfall, get legal guidance from a qualified expert.

They can help you defend yourself in a court of law, or even get it dismissed.

Timing of sale

Timing is a big part of getting as much money for your house as possible.

Timing is a big part of this, as you will ideally avoid an economic downturn.

Can I refuse to pay a mortgage shortfall?

You can appeal against a lender’s claim that you owe them a shortfall. Get independent legal representation to achieve this.

Make sure you present your case’s facts and explain why you shouldn’t pay it. This can be sorted in a court of law.