A mortgage shortfall is where you or your lender (if you have handed back the keys or your home has been repossessed) has sold your home for an amount less than what you owe on your mortgage and any secured loans.
If you have not paid your monthly instalments and interest added to any debt up until the time your home is sold your shortfall could be higher than anticipated. Even if you have been repossessed or handed back the keys due to unaffordability, you are still liable for these costs. There is also the added expense of estate agent and legal fees to take into account too.
Limitation periods are set out under the Limitation Act 1980: https://www.legislation.gov.uk/ukpga/1980/58 in relation to how long a creditor has to take action against you to recover debt. The law stipulates that if your creditor has run out of time, the debt is statute-barred, meaning they can no longer enforce the debt in court.
This is the original money you borrowed. Under section 20 (1) of the Limitation Act your lender has twelve years to take court action on this part of your mortgage shortfall debt.
The interest is the amount you were charged, to borrow the original money. Interest may also continue to be added until your home is sold. For mortgage interest under section 20 (5) of the Limitation Act, your lender has six years to take court action.
It is common practice for a lender to use the money from the sale of the home to pay the interest element first. Therefore unless there is not enough to cover any outstanding interest when the home is sold, the shortfall debt will consist only of the capital element.
County Court Judgment (CCJ)
The Limitation rules will not apply if; your lender took you to court within the limitation period, and a CCJ was made by the court. However if the CCJ is more than six years old, and your creditor wants to enforce the debt using bailiffs or High Court Enforcement Officers, they must obtain permission from the court.
When does the time limit start running?
The Limitation Act, states that for mortgage shortfall debts, the time limit starts to run from the 'cause of action'. There are different rules for other types of debt.
Time limits for the capital
The cause of action for mortgage capital becomes active when the lender becomes entitled to payment in full. This is usually after two or three missed payments under the terms of most mortgages.
It is essential to read the terms of your mortgage however, as some mortgage contracts say the debt is 'payable on demand' making it difficult to use and rely on the Limitation Act.
Time limits for the interest
The Limitation Act makes it clear that where you owe mortgage interest, the cause of action is when the interest becomes due for payment.
Acknowledgement and payment
If a creditor has exceeded the time limit for a mortgage shortfall debt and the debt is now statute barred, or nearing the time limit, you risk restarting the time limit in the following ways:
- By making a payment
- Acknowledging the debt - The time limit, will start running again if you write to the lender, admitting or agreeing you owe the debt
If you made a payment, or acknowledged the debt, but the limitation period had already passed, and no court action had already been taken, it is unlikely that the debt will be enforceable.
The Financial Conduct Authority (FCA)
The FCA regulate mortgage lending and associated problems with existing mortgages.
The FCA’s Mortgages and Home Finance: Conduct of Business sourcebook (MCOB), states that, a lender “must deal fairly with any customer who has a mortgage shortfall debt”.
If a lender decides to recover a shortfall debt, they must inform you in writing, within six years of the date your home was sold. If they don’t, you can put in a complaint about them to the Financial Ombudsman Service (FOS).
UK Finance policy (for cases since 11 February 2000)
UK Finance state in their policy that: “anyone whose property was taken into possession and sold more than six years ago, and who has not been contacted by their lender for recovery of the outstanding debt, will not now be asked to pay the shortfall”.
The UK Finance policy is now part of the FCA’s MCOB rules. The UK Finance part of MCOB is a voluntary code. Lenders are encouraged to follow the code and is seen as good practice. MCOB only covers lenders who are regulated by the Financial Conduct Authority (FCA).
The MCOB rules, including the UK Finance policy, operate separately to the Limitation Act. Therefore making a payment or acknowledging the debt in writing does not matter if you are relying on these rules to argue you should not have to pay. It is useful to be aware of MCOB and the UK Finance policy because you may not be able to rely on the Limitation Act as a legal defence in some situations.
Contact with your lender
If you are contacted by your lender for payment of a mortgage shortfall, it is important to check all the figures they have supplied and consider if the procedures they have followed are correct. In particular request the following details:
- The exact sale price of the property
- Details of all valuations made on the property
- The working out of the interest, before and after the sale
- The Solicitors', estate agents’ fees, and any court or legal fees costs that have been incurred
If you find it difficult to obtain the details from your lender, you can put a request to them (in writing) requesting a free copy, under the Data Protection Act 2018, of all the information they hold regarding the mortgage account. The act also permits the lender to supply details of payments made by a joint account holder, but there is no legal duty for them to do so.
Mortgage Indemnity Insurance also known as Mortgage Indemnity Guarantee (MIG)
It is also important to establish if a MIG payment has been made to your lender, as you can be asked to repay this and be pursued by the insurance provider too.
Normally an insurance payment is made as a lump sum when the mortgage is taken out, or it can be taken off your mortgage advance at the time.
Disputes and complaints
The FCA stipulate in their rules (MCOB) that when a lender sells your home they must obtain the best price that might reasonably be paid. Examples of where they may not have adhered to the rules might be:
- At the time of sale the lender sold your home for considerably less than the market value
- The best price of the property was not obtained as it was not marketed well enough
- You arranged a sale but this was refused by the lender. However after repossession the lender sold the home for a significantly lower price than what you had previously arranged
If you want to dispute the amount of your mortgage shortfall, you have six years from the date of sale to make a claim, it is essential to provide evidence to support your claim.
If you need to make a complaint about the way your lender has dealt with the mortgage shortfall you should follow your lenders complaints procedure first. They should inform you of their final response within eight weeks after which time you can escalate your complaint to the Financial Ombudsman Service (FOS).
Credit reference agencies
Your credit file will be marked as ‘default’ if you have mortgage arrears, and will remain on your file for six years. If the sale of your house covers the outstanding debt or you have cleared any mortgage shortfall, your file will be marked as ‘satisfied’.
The Building Societies Association
T: 020 7520 5900
Financial Conduct Authority
T: 0800 111 6768
Financial Ombudsman Service
T: 0800 023 4567 or 0300 123 9123
Information Commissioner’s Office
T: 0303 123 1113 or 01625 545745
Money Advice Service
Information and advice on money matters
T: 0300 500 5000
Does not deal directly with consumers but their website has useful information.