Mortgage shortfalls are something all homeowners want to avoid.
It can create a difficult situation with your mortgage lender. And it can also put a big strain on your finances.
Read on to learn about what they are and how to avoid them.
What is a mortgage shortfall?
A mortgage shortfall is when the funds from the sale of your house don’t cover the amount you owe on the mortgage.
A mortgage shortfall is not an ideal situation. You will need to find another way to pay back the remaining money you owe.
Hopefully, this won’t be too much. But in the worst cases, it could be tens of thousands.
Lenders will do everything possible to prevent a mortgage shortfall.
Asking for a minimum 10% deposit is one of their main ways of doing this.
Experts recommend carefully considering the price at which you sell your house.
If you have a shortfall, you should determine how to repay it. Discuss this with the lender.
How do I calculate my mortgage shortfall?
Your lender will tell you if you fall into a mortgage shortfall.
You’ll be contacted, usually by a debt collection agency, about how much you owe.
But you can also work this number out yourself. And it’s best to double-check that the lender’s calculations are correct.
You should subtract the sale price of your house from the total amount you owe on the mortgage.
If the answer is negative, then you’re in a shortfall. And don’t forget to include legal costs and estate agency fees in your calculation.
You may also need to calculate the monthly instalments and interest added while your home is being sold. A debt adviser or accountant could help you work all of this out.
How often do mortgage shortfalls happen?
Mortgage shortfalls happen occasionally, but they are not extremely common.
Lenders usually take steps to prevent a mortgage shortfall from happening. This is because it’s not in their interest for it to occur.
Demanding a 10% deposit makes a shortfall less likely. They may also visit your house to determine its true value, thus influencing the amount they lend you to buy it.
This protects them against overinflated valuations that could come down.
In the United Kingdom, thousands of mortgage shortfalls happen across the country every year. But these make up a small percentage of all sales.
Common causes of a mortgage shortfall
1. Downturn in the market
A significant downturn in the housing market can cause a shortfall. Your house is less valuable than when you first bought it. So, you can’t sell it for as much.
For example, if you made a 10% deposit when first buying the house, but the market has dropped by 20%, it’ll usually put you in a shortfall.
Especially if you haven’t built up much equity in the meantime.
2. Repossession
If you miss regular mortgage repayments, then the property could be repossessed.
And this runs the risk of you falling into a shortfall. You’ll often be contacted about this after the repossession occurs.
3. You sell for less than you could’ve done
In some cases, a mortgage shortfall may not be forced upon you. It might create a shortfall if you voluntarily sell the house for less than you could.
You may do this because you’re selling to a friend or family member. Or maybe you want to sell as quickly as possible.
If you take this route, make sure to prepare for the shortfall. Figure out how you’ll pay it back.
How do I pay back a mortgage shortfall?
Your lender will typically contact you if you fall into a mortgage shortfall. They’ll explain the situation and their calculations.
Make sure to double-check this to ensure it’s accurate. If you disagree with their calculations, you should put this in writing. Get support from qualified experts.
You usually pay back a mortgage shortfall by agreeing on a payment plan with your lender.
This will occur over several months or years. Or you could do it in one big sum, to be paid before a certain date.
Your lender’s goal is to recover the full amount owed. So, they’re often open to negotiation, as long as it means they’ll get repaid.
Any agreements must be put in writing. Some lenders also consider your financial and personal situation.
How long do I have to pay back a mortgage shortfall?
This will be agreed upon, in writing, with your lender. A payment plan will be outlined that you both are fine with. You must meet your obligations.
Remember that due to ‘The Limitation Act’, lenders have time limits on when they can pursue debt recovery. This is 12 years for capital owed and 6 years for interest.
Double-check that your circumstance falls within this timeframe. Otherwise, you might not need to pay them back. A specialist can support you with this.
Ways to avoid a mortgage shortfall
Calculate the numbers before you sell
You should calculate the number before you sell your house. Work out what you expect to sell for, and how much you owe on your mortgage.
Prepare for a worst-case scenario. Also, factor in legal fees and estate agent costs. This can stop you from going down an avenue that leads to a shortfall.
Wait (if you can)
The housing market in the UK has a great track record. It often improves year-on-year.
If there’s been a recent downturn, this will probably correct itself. The longer you wait, the more equity you build in your house.
And the more time there is for the property prices to go up.
Pay a larger deposit when you first buy
A larger deposit on your house reduces the likelihood of a mortgage shortfall.
This is because there’s a larger gap between the equity you’ve built up and the amount you owe.
A minimum 10% deposit is a smart idea. And if you can do more, then do.
Put your best foot forward during the selling process.
You should get the best value possible when selling your house, including:
- Using the best estate agents
- Staging your property well
- Searching while it’s a seller’s market.
The more you sell for, the less likely you will get a shortfall.
Will a mortgage shortfall stop me from getting another mortgage?
Not if you pay it off. It should make no difference once you’ve paid it off.
Other lenders will view you negatively if you’ve failed to pay off a shortfall.
If you’re in the middle of a payment plan, then a new lender could be reluctant to lend until this is finished.
Otherwise, it’s more likely you’ll miss one of your payments.
