House Sold For More Than the Arrears - What Happens?

By: Louise Smith, barrister - Updated: 16 Nov 2022 | *Discuss

 

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Q.

I am wondering if you can help. What happens if your house is repossessed and goes up for sale, and the house is sold for more than the arrears on the mortgage?

A.

If a lender repossesses a borrower’s property because of mortgage arrears the intention will be to sell the property and use the sale proceeds to clear the debt owed by the borrower. The lender has a duty to sell the property for the best price they can reasonably obtain. The lender must not simply offload the property for a price which covers the mortgage debt.

If a borrower suspected that a lender had sold a repossessed property for too low a price this could provide the basis of a legal case against the lender. Lenders may sell a repossessed property through an estate agent or at an auction. The property should be sold on the open market to avoid any suggestion that it has been sold for too low a price.

When a property is repossessed due to mortgage arrears, the whole debt under the mortgage becomes payable by the borrower. This may mean that, although the property may have been repossessed due to mortgage arrears of a few thousand pounds, the borrower is now liable for a total mortgage debt of hundreds of thousands of pounds. In addition to this the borrower will almost certainly have to pay the lender’s legal costs of taking a case to court to get a repossession order. The legal costs will usually be added to the total outstanding mortgage debt.

Therefore, when a repossessed property is sold by the lender it is important to note that the lender is entitled to recover the full outstanding mortgage debt from the sale proceeds and not just the arrears. In fact it does not stop there. The lender is also entitled to add the costs of selling the property – and any other costs they may have incurred during the repossession and sale process – to the final bill owed by the borrower.

Borrowers should also be aware that many lenders will continue to charge interest on the mortgage debt until the property is sold meaning that the final mortgage debt may be higher than the amount owed when the repossession order was made. The borrower is entitled to a breakdown of how the final debt has been calculated.

In an ideal world there will be equity in the property - so that when it is sold there will be money left over from the sale proceeds after the mortgage debt has been paid off. If there is money left over after the full mortgage debt and all other costs have been paid the balance of the sale proceeds should be returned to the borrower. If, however, the sale proceeds do not cover all of these costs the borrower will still be left owing this shortfall debt to the lender.

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