Mortgage property repossession
What happens to a
mortgage debt
after a home is repossessed?
After a lender takes a property into possession, interest will generally
continue to be charged on the mortgage loan until the property is sold. There
will also be other costs charged to the mortgage account, including estate
agents' costs in selling the property and legal costs.
The lender has a legal duty to sell the property for the best price that can
reasonably be obtained. If this results in a surplus after all the money owed to
the lender and any other secured lender has been repaid, then this surplus is
returned to the former borrower. But if the sale proceeds are not enough to pay
off the money owing to the lender, the borrower faces a "shortfall debt", which
they still owe to the lender after possession.
What will the lender do if there is a shortfall debt?
The action that the lender will take depends on the circumstances. Usually, the
lender will contact the borrower as soon as possible after the sale of the
property and give a final financial statement. This will show the level of debt
still owing to the lender. It is important that borrowers keep lenders informed
of their addresses after possession so that they receive this information.
If there is a shortfall debt, the lender may:
immediately discuss proposals with the borrower on how they might repay the
debt; or
try to give the borrower some time to get back on their feet financially before
contacting them about repaying the debt.
How long after the repossession can lenders seek the recovery of the debt?
In England, Wales and Northern Ireland, a lender legally has 12 years in which
to contact the borrower to begin the process of obtaining repayment of shortfall
debt; this period is usually 5 years in Scotland.
However, lenders are committed to fair and sympathetic treatment of people who
have suffered repossession, and accept that individuals should not face long
delays before lenders contact them to discuss repayment of the shortfall. Where
a forwarding address is known, most lenders will contact borrowers fairly soon
after possession with a view to agreeing a manageable arrangement for repaying
all or some of the debt.
In addition, from 11 February 2000, lenders who are members of the Council of
Mortgage Lenders have agreed voluntarily that they will begin all recovery
action for the shortfall within the first six years following the sale of a
property in possession. Anyone whose property was taken into possession and sold
more than six years ago, and who has not been contacted by their lender about
recovering any outstanding debt will not now be asked to pay the shortfall. The
Association of British Insurers supports this approach on behalf of the mortgage
indemnity insurers.
Does this time limit apply to every case?
The new time limit does not affect anyone who is already -
adhering to alternative payment arrangements for the shortfall debt;
or who has already been contacted by the lender, even if the initial contact was
made with them by the lender after six years from the date of the sale of the
property in possession.
The six year limit only refers to beginning recovery action and does not affect
a lender's ability to recover the shortfall debt over a longer period. If there
is evidence of mortgage fraud, the new time limit will not apply.
Following the sale of a property in possession, lenders often find it difficult
to contact the former borrower to advise them of any surplus monies or shortfall
debt. Lenders use a variety of measures to identify where the individual is now
living. This might include using tracing agents. Situations can arise where a
lender or its third party agent is trying to contact the individual (for
example, by letter or telephone) to discuss repayment of the shortfall, but the
individual simply chooses to ignore such contact. This is despite the fact that
the contact is being made at the individual's new address. In these cases,
lenders will consider that contact has been made for the purposes of the new six
year limit. If an individual is unclear whether contact has been made within the
six year period, the lender will be able to confirm the position.
The material featured on this page has been provided by The Council of Mortgage
Lenders CML.
Published November 2005
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