Do I still owe a mortgage shortfall after repossession?

Yes. If your home is repossessed and sells for less than you owe, you can still owe the difference, and your lender can ask you to pay it back. If you owe more than the property sells for, you might have to pay back the mortgage shortfall¹. If the money from the sale of your home is not enough to cover your mortgage debts, you will still owe the outstanding amount to your lender².

The debt that remains after the sale proceeds have been used up is called a mortgage shortfall³. It is not wiped out by the repossession itself, and it is not cancelled by handing back the keys. You will still owe money to your lender or mortgage indemnity insurer if the sale does not cover your debt⁴.

What follows explains what a shortfall is, how it is worked out, who can chase it, how long it lasts, and what happens if the sale raises more than you owe.

What a mortgage shortfall is

A mortgage shortfall is the money you still owe to your mortgage or secured loan lender when the amount your home is sold for is not enough to pay the outstanding mortgage and any secured loans⁷. The Financial Ombudsman Service describes it as the debt that remains after the sale proceeds have been used up³.

It is a separate debt from the mortgage itself, even though it comes from the same loan. The mortgage was secured on your home. Once the home is sold, there is nothing left securing the shortfall, but the debt remains. If selling your home does not raise enough money to repay the first mortgage, and any other mortgages, plus all the costs, you may still owe some money to the lender⁸.

A shortfall can build up from more than the original loan. It may include the monthly instalments and interest added while your property is being sold³. Where the sale is being handled by your lender, the debt might also include legal costs and estate agency fees³. Until the house is sold, you are liable for these costs, as well as legal and estate agent's fees⁷.

Lenders set this out in their own terms. Dudley Building Society states that if there are insufficient funds to repay your mortgage balance you will still owe whatever is remaining, referred to as a shortfall debt⁹. TSB says that if there is not enough money from the sale to pay off the entire mortgage, you will still owe the amount that is left over¹⁰.

How the shortfall is worked out: sale price against what you owe

The shortfall is the gap between what the property sells for and what you owe at the point of sale. If the sale does not cover the full amount that is left on your mortgage, you will have to pay back the difference¹¹. The same rule applies in Scotland: you will have to pay back the difference if the sale does not cover what is left on your mortgage¹².

What you owe is not just the original loan. It can include:

• any arrears
• ongoing mortgage and interest payments
• buildings insurance
• penalty charges for missed payments¹³

Interest keeps running until the sale completes. After you have been evicted, your lender will still add interest to your mortgage account until the property is sold⁸. Yorkshire Building Society's mortgage conditions state that if the property is sold for less than everything owed, you will still owe the difference, and interest may continue to be charged at the interest rate until you pay it¹⁴.

Everyone named on the mortgage is responsible for the full amount, even if they usually only pay part of it¹⁵. That matters for joint borrowers, and for guarantor arrangements: if a guarantor is forced to sell in negative equity or faces repossession, that family member will be liable for meeting the shortfall, which may cost them their own home¹⁶.

Your lender can ask you to pay back the difference

The lender can take you to court for any extra money you owe after the sale¹⁷. In practice, your mortgage lender will send you a bill for the shortfall on your mortgage, and if you are unable to make an arrangement to repay it, your lender might go to court to force you to pay this amount¹⁸.

There is a shortcut for lenders who have already been through the courts. If your lender evicts you and is not able to get back all the money you owe from selling the property, they can force you to pay the difference without going to court again¹⁹.

The shortfall debt may not stay with your original lender. It may be held by your former lender, by someone acting on their behalf, or by a debt collection company that has bought the debt from the lender³. That means the letter asking for payment may come from a firm you have never dealt with.

If you had to pay for mortgage indemnity insurance when you took out your mortgage, it will pay all or part of the shortfall to the lender, but you remain responsible for the money and can be asked to pay it back after the property is sold¹³. The lender or the insurer can take legal action²⁰.

Does handing back the keys cancel what I owe on the mortgage?

No. Handing back the keys does not cancel the debt, and it does not stop the meter running. If your home is repossessed or you hand over the keys to your lender, you will still be responsible for your mortgage payments until the home is sold¹³. You remain responsible for mortgage interest, buildings insurance and maintenance costs until the property is sold, and you must repay the difference if the sale price does not cover what you owe²¹.

Selling voluntarily rather than waiting for repossession does not remove the shortfall either. If you sell the property for less than the amount you owe on your mortgage, you will still have to pay the amount that remains outstanding²². You will still have to repay the full amount that is outstanding on your mortgage, and your lender can take legal action against you to get back any unpaid debts even after the property is sold⁵.

The same principle runs through every type of mortgage. For an interest-only mortgage where the loan has not been repaid by the end of the term, lenders will have the legal right to repossess your home²³. For a retirement interest-only mortgage, if the mortgage amount owed is greater than what you sell your house for, you will still need to repay the remainder, possibly from savings, other assets or your estate²⁴. For buy to let, the rental property may be repossessed if repayments are not kept up, and any shortfall after sale remains the borrower's responsibility²⁵.

Why a repossessed home often sells for less than the mortgage balance

A forced sale rarely gets the best price. Your home will usually be sold as quickly as possible, often for less than the market value, meaning you would owe the bank even more than you would have if you had sold the property yourself¹⁶. That is the single biggest reason a shortfall appears even where the property was worth roughly what you owed.

Interest and costs keep accruing in the meantime. After eviction, interest continues to be added until the property is sold⁸, and the shortfall can include the monthly instalments and interest added while the property is being sold³. Arrears, penalty charges for missed payments and buildings insurance can all be part of the final figure¹³.

There is a route to challenge the amount if the lender handled the sale badly. You can dispute the shortfall if your lender significantly undervalued your home when selling it, did not properly advertise your home before selling it, or blocked you from selling it yourself and then sold it for less than you were offered¹². If any of those apply, the Financial Ombudsman Service can look at a complaint about how the shortfall arose³.

What happens if the repossessed home sells for more than I owe?

If the sale raises more than the debt, the surplus comes back to you. Your lender and any other secured debts will use the money to clear your debt with them, and you will get any money left over⁵. If the sale does not cover your debt, you may be asked to pay this back⁵.

In practice, a surplus is unusual after a repossession, because the property is typically sold quickly and at a discount¹⁶. But the rule matters: the lender is not entitled to keep more than it is owed.

Who do I pay a mortgage shortfall to?

The shortfall is usually paid to whoever holds the debt at the time. That may be your former lender, someone acting on their behalf, or a debt collection company that has bought the debt from the lender³.

If mortgage indemnity insurance was part of your original deal, the insurer may pay the lender and then look to you. The insurance will pay all or part of the shortfall to the lender, but you remain responsible for the money and can be asked to pay it back after the property is sold¹³. The lender or the insurer can take legal action²⁰.

If there is a guarantor on the mortgage, they can be pursued too. Where a guarantor is forced to sell in negative equity or faces repossession, that family member will be liable for meeting the shortfall, which may cost them their own home¹⁶.

How long a lender has to chase the shortfall

There is a time limit on court action, called the limitation period. The cause of action, which is when the limitation period starts running, for mortgage shortfalls is usually when the lender is entitled to be repaid in full, usually after two or three missed payments²⁶.

Joint debts carry a trap. For a shortfall debt in joint names, if one borrower has made a payment towards the debt, the limitation period starts running again from the beginning for both borrowers from the date of that payment⁷. A payment by the other borrower restarts the limitation period for both borrowers from the date of that payment²⁷. That means a small payment by one person can revive the clock for both, so it is worth taking advice before making any payment on an old shortfall.

Bankruptcy and the shortfall

Bankruptcy can release you from a mortgage shortfall if your home is sold after your bankruptcy has ended²⁸. That is a significant protection, but it comes with conditions.

While you are bankrupt you still have to keep paying your mortgage and any other debts secured on your home, and bankruptcy will not stop your mortgage lender from taking steps to repossess your home if you fall behind²⁸. The trustee tells your mortgage lender you are bankrupt, and they may consider repossession even if you are up to date with your payments, and it is more likely if you are behind on payments²⁹.

Getting help before the shortfall becomes a problem

A shortfall is easier to manage before the sale than after it. A court can often stop repossession of your home if you show that you can repay the arrears by the end of the mortgage term³⁰. Lenders also have to consider alternatives, and free, impartial help is available.

If you are behind on payments, the practical steps are:

1. Talk to your lender early, before missed payments turn into legal action.
2. Get free debt advice from a charity such as National Debtline or StepChange, or from Citizens Advice.
3. Ask about options such as a repayment plan, a payment holiday or selling the home yourself.
4. If court action has started, get advice on the defence form and the hearing.

If you are struggling, free and impartial help is available from MoneyHelper, from debt advice charities such as National Debtline and StepChange, and from Citizens Advice. If you have a complaint about how your lender handled the shortfall, the Financial Ombudsman Service can look at it³.