You may be facing a repossession and heard about a mortgage shortfall. It might be you’re already going through being repossessed and worried about a shortfall on your mortgage. Either way, you need to be able understand what is a mortgage shortfall. Let’s take a look…
What is a mortgage shortfall and how does it come about?
After a repossession the lender normally sells your property to recover the money they are owed, i.e. the mortgage.
A mortgage shortfall happens when the amount your home is sold for isn’t enough to repay the outstanding mortgage and other loans secured on it. This can happen if your home is repossessed or if you hand back the keys to your mortgage lender. In the UK your mortgage company can seek repayment of any shortfall you have.
Banks are in the business of lending money. They are not in the property business. This means that once your property has been repossessed, the bank simply wants to get rid of it.
A bank wants to sell your property as quickly as they can. They’re not overly concerned about how much they sell it for either. The reason for this is that they’ve already written your debt off as being bad. Therefore, whatever they can achieve in sale proceeds on the sale of your home is a bonus.
If the bank cannot find an immediate buyer on their books, as many banks have investors lined up to buy repossessed properties, they’ll usually put your property to auction.
The bank will sell your home at under fair market value
Whichever way the bank sells your property, either directly to an investor or at an auction, it won’t be a full market value. In fact the price your mortgage lender will sell your house for is likely to be around 75% of its full market price.
This means that unless your outstanding mortgage is less than 75% of the market value, the proceeds of sale are unlikely to be enough to clear your debt. Plus this doesn’t take account of legal fees, repossession costs and selling fees.
Once these are taken from the sale proceeds, you are looking at net proceeds of less than 75% of full market value.
Therefore, unless you have significant equity in your house (i.e. probably more that 30%), you are going to end up with a mortgage shortfall.
The above scenario paints a picture on the basis you might have positive equity. But what if you have negative equity?
On the basis that the net proceeds are going to be less than 75% of market value. Plus on the basis that you’re in negative equity. Which means your outstanding mortgage is more than what your property is worth. The net proceeds are never going to be enough to repay the debt you owe.
If on top of your mortgage you have other secured loans, you are even less likely to have enough spare equity to repay all the loans secured on your property when it’s sold.
Your mortgage lender will have first charge over your property. This means than on sale, they will receive the sale proceeds first.
It is only after this, where there are excess proceeds over and above what you owe on your mortgage, that any excess proceeds can be used to repay your other secured loans.
However, all of these secured loans go to make up a financial shortfall, which will be added to the mortgage shortfall, should there be one. It will be up to each lender to pursue you for what is left outstanding after the repossession process.
In either situation, and whether you have insufficient positive equity or if you are in negative equity, the money you still owe to your mortgage company or other secured loan lender in this situation, is called a ‘mortgage shortfall‘.
What about if you have arrears?
You don’t tend to be repossessed if you’ve not gone into arrears, unless you volunteer to have your house repossessed and surrender the keys.
Very often the final outstanding debt, which needs to be repaid from the sale of your home, will include the monthly instalment arrears and interest. The total of your arrears will be added to the debt, plus any accruing interest whilst your home is being sold.
This all adds up and makes it extremely likely you’ll have a mortgage shortfall at the end of you being repossessed. This is just one of the many reasons why you should avoid being repossessed at all costs.
Your credit report will be shot to pieces, you will have gone through extreme stress during the repossession process and on top of all that, you still need to find somewhere else to live.
In many situations where people have had their homes repossessed, or where they’ve handed back the keys to their mortgage lender, it’s only at the end they are told they still owe money.
This is sad, as it happens because of a misunderstanding of how the UK mortgage system works.
But it happens because all UK mortgages are what’s call a recourse loan. With a recourse loan, your mortgage lender can keep chasing you for any money you still owe them. This is even the case after they have repossessed your home and possibly sold it at a loss.
Mortgage shortfall example explained
It’s worth giving you examples of a mortgage shortfall, as follows:
Mortgage shortfall example #1
Property is worth £250,000.
Mortgage outstanding £182,500 (73% loan to value or 27% equity).
Mortgage arrears and additional interest to date of house sale £10,800.
Legal fees and repossession court fees £4,750.
Auction proceeds £323,000 and auction fees were £11,628.
In this shortfall example, mortgage shortfall would be £139,678, which is calculated as follows:
Mortgage shortfall example #2 calculation explained
£
£
Sale proceeds
323,000
Less:
Outstanding mortgage
435,500
Mortgage arrears and interest
10,800
Legal fees and court costs
4,750
Auction fees
11,628
___________
462,678
___________
Mortgage shortfall
139,678
___________
In both the above mortgage shortfall examples the mortgage lender could pursue the borrower for the shortfall amount. If the borrower is unable to repay the shortfall, the mortgage lender could press bankruptcy.
Bankruptcy is another outcome you should avoid at all costs. Being made bankrupt is stressful and will go against your credit report in a huge way.
This will also make it extremely difficult to obtain credit in the future. Plus you’ll have to declare this on insurance and other applications forms in the future.
How to stop your home from being repossessed of facing the possibility of bankruptcy
I’m not going to go into too much detail about this, as I’ve covered it in detail in a previous article (see more reading below on how to stop a repossession).
But I want to express how important it is to stop yourself from being repossessed in this article. Plus to explain that there are alternatives.
The best way to stop your home from being repossessed is to begin by speaking with your mortgage lender. Don’t bury your head in the sand and look for ways to resolve your financial predicament.
They will help you in how to approach your mortgage lender. Plus they will explain what rights you have and what protocol the bank has to follow for a repossession.
Failing the above help and if you’d prefer to sell your house, you can contact us. We are always hear to help and discuss your problems.
Selling your home to us will benefit you in the following ways:
Above all it will avoid a repossession.
Help with your credit report, as you won’t have a repossession against your name. But be aware that if at this stage you’re in arrears, your credit report will already be affected.
You’ll not have a mortgage shortfall to contend with at the end of a repossession.
This will help you to avoid bankruptcy.
You’re likely to end up with cash from the deal, especially if your have equity in your house.
We can often provide help with your first month’s rent and deposits too.
Please consider the above benefits if you find yourself in this situation. If you are at the point of researching mortgage shortfalls, you are obviously in some form of financial difficulty.
Or you are researching this for a friend or family member. If you are looking into this for someone else, please either get them to contact us, or we’d be happy to talk to you in the first place.
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What Is A Mortgage Shortfall? (Mortgage Shortfall Debt After Repossession)
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Article written by Russell Bowyer who has been investing in property since purchasing his first commercial property in the 1990's for his own Chartered Accountancy business. But his first property investment project was to turn an old dilapidated restaurant into a large 5-bed home, which he purchased for £117,500 and sold for £450,000 (to see an "after" photo of the house before it was sold see here: About). Russell owns a number of investment properties, which includes houses, flats and HMO's. More recently he has turned his creative side to investing in property using lease options. His largest lease option deal to date was to acquire 12 properties worth over £2 million for just £12, which means he paid just £1 to acquire each property!
