Paying off mortgage debts
This content applies to England only.
Housing laws vary between England and Scotland. Get advice relating to Scotland
If the money from the sale of your home isn't enough to pay off your mortgage debts, you will still owe the outstanding amount to your lender or mortgage indemnity insurer. They could decide to sue you to get the money back. This has to be done within a certain amount of time, and it may be possible to negotiate a manageable way to pay off the shortfall.
Will I still be in debt?
When the property is sold, your lender or insurer will probably send you a detailed final financial statement. This will tell you whether any debt is still outstanding, and should include a breakdown of all the costs involved.
Your lender may contact you soon after the repossession to ask how you intend to repay the debt, although they might give you time to get back on your feet first. It is quite common for several years to pass before your lender takes legal action to get back the money you owe. It is very important to get independent legal advice before you reply to any letters asking how you intend to pay off your debt.
When can action be started?
If the court issued a money judgment at the same time as the possession order, there is no time limit on when legal action has to be started.
If the court did not make a money judgement, your lender has 12 years to start any legal action to recover any money you owe. However, the Council of Mortgage Lenders (whose members include all the main high street lenders) and the Association of British Insurers (which represents many mortgage indemnity guarantee insurers) expect their members to start action within six years.
If your lender or insurer contacts you after the six years have ended, get advice. You may not have to pay and you may be able to complain to the Council of Mortgage Lenders or the Financial Ombudsman Service.
How can the debt be repaid?
You may be able to repay your debts over a number of years. It is usually possible to negotiate how this will be done, but you should get advice first. An adviser can help you to work out the best way to deal with your debt. Even if it's impossible for you to pay off everything you owe, you might be able to:
- ask your lender to write off all or part of your debt
- pay a lump sum as a full and final settlement – your lender may accept an amount which is less than you owe
- make arrangements to pay off all or part of the debt in instalments over an agreed period
- declare yourself bankrupt.
Writing off the debt
It is very unlikely that your lender will agree to write off all your debt. This usually only happens in extreme situations, where there is very little chance that your situation will improve in future and it is not worth them pursuing you for the debt. However, some lenders will agree to write off part of the debt if you can make arrangements to repay the remainder through a lump sum payment or regular instalments.
Lump sum payments
If you can afford it, you could offer to pay a lump sum on condition that the rest of your debt is written off. You might be able to do this by selling valuable belongings (such as a car) or by borrowing money from friends or family. You may also be able to take out a new loan to pay off your debts, but you should get advice first, and avoid loans with high interest rates.
Even if you can't afford the full amount, your lender might agree to accept a lump sum payment as 'full and final settlement'. If you want to do this, get independent advice first. If it's not done in the correct way, through a formal agreement, your debts may not be cleared and your lender may pursue you for any outstanding balances.
Paying by instalments
Your lender may allow you to pay off all or part of your debt in regular instalments over a number of years (usually within the original term of your mortgage). If you do this, your lender could be willing to write off part of the debt. It's important not to agree to pay more than you can realistically afford.
Bankruptcy
Depending on your situation, one option could be to apply for bankruptcy. If you do this, any assets you have can be used to pay off your debts. This usually lasts for a period of one year. After this time, any remaining debts you have will be written off, and you will probably be discharged from bankruptcy. However, bankruptcy will have a big impact on your ability to get credit in future, so it is essential to get advice before doing this.
How will it affect my credit rating?
People with a history of mortgage arrears and other debt problems often have difficulties finding a landlord or lender who will give them a tenancy or mortgage. Credit reference agencies such as Experian and Equifax usually check your credit history for your landlord or lender before they give you a tenancy agreement or lend you money to buy a new home.
Most mortgage lenders will also check the Council for Mortgage Lenders' Possessions Register, which holds information about repossessions by any of its members during the last six years. You can write to the credit reference agency asking for a copy of the information they hold on you. You normally have to pay a £2 fee, but you might not have to pay if a specialist adviser does this for you or the agency offers a free report. The agency should send you a copy of the information they hold on you within seven working days, and explain how you can change it if it is not correct.
If the agency refuses to change information that is incorrect, get advice. You may be able to complain to the Information Commissioner's Office.
If your home has been repossessed in the past you may have difficulty getting another mortgage in the future.
Where can I get help?
The best option for dealing with your debts will depend on your personal circumstances. A specialist debt adviser can help you to work out the most realistic way to deal with your debts and may be able to help you to:
- manage your income and expenditure and work out your options
- maximise your income, for example by identifying benefits that you might be entitled to
- explain the reasons for your financial problems to your lender and/or insurer
- explain the steps you have taken to keep your debts to a minimum
- produce a detailed summary of your finances to show that you have very little money available to repay the debt
- organise and prioritise payments of any other debts you have.
Many of Shelter's local advice services have advisers specialising in debt. Alternatively, contact the National Debtline or find out if your local Citizens Advice has a specialist debt adviser. Use our directory to find services in your area.
