Mortgage shortfalls

 October 2015

Fact sheet no. 11

What is a mortgage shortfall?

In some situations where you have had your home repossessed, or handed back the keys to your mortgage lender, you may later be told you still owe money. This happens when the amount your home is sold for is not enough to pay the outstanding mortgage and any secured loans.

Money you still owe to your mortgage or secured loan lender in this situation, is called a ‘mortgage shortfall’.

Sometimes the debt includes the monthly instalments and interest added to the debt while your home is being sold.  Until the house is sold, you are liable for these costs, as well as legal and estate agents’ fees. 

How long can I be pursued for the debt?

The legal position under the Limitation Act

Information:

limitation periods

Limitation periods for debts are important. This is because if the creditor has run out of time, you may not have to pay the debt back.

The Limitation Act 1980 sets out the rules on how long a creditor (who you owe money to) has to take certain action against you to recover a debt. If, by law, your creditor has run out of time the debt is ‘statute-barred’.  

There has been some confusion in the past about mortgage shortfalls and the Limitation Act. However, the Court of Appeal has now decided that the following limitation periods apply to mortgage shortfall debts.

If you owe mortgage capital

Mortgage capital is the money you originally borrowed. For this part of a mortgage shortfall debt, the lender has 12 years to use court action to make you pay. This is under section 20 (1) of the Limitation Act.

If you owe interest

Mortgage interest is the interest you were charged to borrow the money. Your lender may also charge interest after your home is sold. For this part of a mortgage shortfall debt, the lender has six years to use court action to make you pay. This is under section 20 (5) of the Limitation Act. 

Extra advice:

use of bailiffs

If your lender took you to court within the limitation period, and a county court judgment (CCJ) was made for the debt, you cannot use the Limitation Act. If your CCJ is more than six years old, and the creditor wants to use bailiffs or High Court Enforcement Officers, they must first get permission from the court. Contact us for advice.

Information:

your debt will probably be capital

The money from the sale of your house will usually be taken by your lender to pay interest before capital. So, unless the sale price is not enough to cover the outstanding interest, the shortfall debt will be all capital. This means that the 12-year limitation period will apply.