Paying off mortgage shortfall debt

If the money from the sale of your home isn't enough to cover your mortgage debts, you will still owe the outstanding amount to your lender or mortgage indemnity insurer. This is known as a "mortgage shortfall" and they may decide to go to court to try and get the money back from you. This has to be done within a certain amount of time, and it may be possible to negotiate a manageable way to pay off the shortfall or if all else fails declare bankruptcy.

Will my mortgage indemnity guarantee help with a mortgage shortfall?

If you had to pay for a mortgage indemnity guarantee when you took out your mortgage, it will pay all or part of the shortfall to your lender. However, this doesn't mean that your debt has been paid - it has simply been transferred from your lender to the insurer. The insurer can take legal action against you to get back any money it had to pay out.

How will I know if I have any debt and, if so, how much?

When the property is sold, your lender or insurer should send you a detailed final financial statement. This will tell you whether any debt is still outstanding, and should include a detailed breakdown of all the costs involved.

You may be contacted soon after the repossession to ask how you intend to repay the debt, although the lender or insurer may give you time to get back on your feet first. It is quite common for several years to pass before legal action to get back the money you owe is started. It is very important to get independent advice before you reply to any letters asking how you intend to pay off your debt. The lender may have let too much time pass before asking you to pay the debt, in which case you may not have to pay it.

When can action be started?

It may be several years before your lender takes any action to get back the mortgage shortfall you owe.

Your lender may treat the shortfall as capital and argue that they have twenty years to begin action against you for the debt. You may be able to argue that the shortfall is what is known as an unsecured debt and your lender only has five years to pursue this kind of debt.

If your lender or insurer contacts you after the five years have ended, talk to a solicitor or a money adviser before taking any action. Whatever you do, don't acknowledge that you owe the debt. You may not have to pay and you may be able to complain to the Financial Ombudsman Service. You can find out more about extinction of debt at the National Debtline website.

How can the debt be repaid?

Your debts can be repaid over a number of years. It is usually possible to negotiate how this will be done, but you should get advice first (see 'where can I get help' below). An adviser can help you work out the best way to deal with your debt. Even if it's impossible for you to pay off everything you owe, you may be able to:

  • ask your lender to write off all or part of your debt

  • pay a lump sum as a 'full and final settlement' - your lender may accept an amount which is less than the total sum you owe

  • make arrangements to pay off all or part of the debt in instalments over an agreed period

  • declare yourself bankrupt.

Writing off the debt

It is very unlikely that your lender will agree to write off all your debt. This usually only happens in extreme situations, where there is very little chance that your situation will improve in future. However, some lenders will agree to write off part of the debt if you can make arrangements to pay off the remaining money through a lump sum payment or regular instalments.

Lump sum payments

If you can afford it, you can offer to pay a lump sum on the condition that the rest of your debt will be written off. You may be able to do this by selling valuable belongings (such as a car) or by borrowing money from friends or family. You may also be able to take out a new loan to pay off your debts, but you should get advice first, and avoid loans with high interest rates.

Even if you can't afford the full amount, your lender may agree to accept a lump sum payment as 'full and final settlement'. If you want to do this, get independent advice first. If it's not done in the correct way, through a formal agreement, your debts may not be cleared.

You can find more information about full and final settlements at the National Debtline website.

Paying by instalments

Your lender may allow you to pay off all or part of your debt in regular instalments over a number of years (usually within the original term of your mortgage). If you do this, your lender may be willing to write off part of the debt. It's important not to agree to pay more than you can realistically afford.

Voluntary bankruptcy

Depending on your situation, you may decide to declare yourself bankrupt. If you do this in Scotland, any assets you have can be used to pay off your debts during a period of two or three years. After this time, most remaining debts you have will be written off, and you will probably be discharged from bankruptcy. However, bankruptcy will have a big impact on your ability to get credit in future, so it is essential to get advice before doing this.

In Scotland, bankruptcy refers to both sequestration (the legal process whereby you are formally declared bankrupt by the sheriff court) and trust deeds (a more informal process in which you voluntarily transfer some or all of your assets to a trustee to administer on behalf of your creditors). It is essential that you get advice since these are two separate processes.

You can find more information and advice about bankruptcy at the National Debtline website.

Can I dispute the amount I still owe?

In some circumstances, you may be able to dispute the shortfall you owe your lender. This could be the case if:

  • the lender sold your home for a price that was significantly lower than its market value

  • the lender didn't advertise your home properly before selling it

  • you arranged to sell your home but your lender refused to let the sale go through, then sold the property for a lower price

  • the lender left your house empty for a long time before selling it, when they could have rented it out to help cover costs

  • the lender hasn't sold your home at all. In this case you should be able to get an order from the court to force them to do so.

Get advice from a solicitor or other advice agency if you think any of these circumstances apply to you.

How will my credit rating be affected?

People with a history of debt problems are likely to have low credit ratings. This means you may find it difficult to get a tenancy or mortgage. Landlords and lenders usually check your credit history with credit reference agencies such as Experian, Equifax and Callcredit before they will give you a tenancy agreement or lend you money to buy a new home.

You can ask the credit reference agencies to send you a copy of the information they hold on you. You normally have to pay a small fee for this, but may not have to if a specialist adviser does this for you. The Experian, Equifax and Callcredit websites tell you how to access your credit records and how you can change any information that isn't correct.

Where can I get help?

The best option for dealing with your debts will depend on your personal circumstances. A specialist debt adviser can help you to work out the most realistic way to deal with your debts. Contact the National Debtline or a money advice centre, or find out if your local Citizens Advice has a specialist debt adviser. They may be able to help you:

  • manage your income and expenditure and work out your options

  • explain the reasons for your financial problems to your lender and/or insurer

  • explain the steps you have taken to keep your debts to a minimum

  • produce a detailed summary of your finances to show that you have very little money available to repay the debt

  • organise and prioritise payments of any other debts you have.

You can find out more about mortgage shortfalls at the National Debtline website. Here you'll also find sample letters you can use when writing to your creditors.

If you need to talk to someone, we’ll do our best to help. Get Help

Last updated: 29 August 2017

Housing laws differ between Scotland and England.

This content applies to Scotland only.

Get advice if you're in England