Should I sell my house to pay off debt?

The rising cost of living is having a big impact on personal finances. According to the Financial Conduct Authority (FCA), 7.4 million people are struggling to pay bills and credit repayments. 5.5 million people say they have been unable to make at least one bill payment and 2.7 million people have sought help from a lender, debt advisor or financial support charity due to financial difficulties.

It is well documented that debt can have a devastating impact on your mental health.  Those living with debt often experience feelings of guilt, embarrassment, hopelessness, depression and anxiety.  If you have debt that you’re struggling to repay and are thinking through your options, you may be considering selling your property. This guide will look at the pros and cons of doing so, and explore what other options may be available to you.

Paying off debt with your house

Should I sell my house to get out of debt?

If you are a homeowner facing significant debt, it may seem like the logical move to sell your property to clear the financial burden. Selling your property is a bit decision though, and not one that should be made lightly.

It’s wise to start by getting a clear idea of the situation you’re facing.  Making a list of everything you owe will help you decide on the best way forward.

If you feel the only way to clear the debt is to sell your property, it’s vital that you think through your plans after the house sale.  Will you be able to afford another, smaller property? Will you rent? 

It’s also important to be aware that the first debt that will be repaid from the sale of your property will be your mortgage and any other loans or finance secured on your property.  You will then be able to use any remaining profit from the sale to repay other debt. If the sale of your property is not enough to repay your outstanding mortgage and any other debts secured on your property (eg. a secured loan), you will still be responsible for the outstanding debt.

What are the alternatives to selling your house to pay off debt?

If you are a homeowner, your property is likely to be your biggest financial asset.  For those who have a reasonable amount of equity tied up in a property (the amount of ‘profit’ when your mortgage is deducted from the value of the property), it might seem like the obvious option to sell your house to clear debt, but it’s not a decision to make lightly, so what are your other options?

If you’re struggling with your repayments and your debt is mainly on credit cards, reducing the amount of interest you pay on your debt will reduce your monthly repayments. This will enable you to pay more off the balance each month.  You may want to consider either switching your card balance to a credit card with an interest-free period or taking out a debt consolidation loan with a lower interest rate. 

Debt can be overwhelming.  If you’re struggling with debt, you can contact National Debtline for free, confidential and impartial advice on your different options 0808 808 4000 or by visiting their website: www.nationaldebtline.org

Can I sell my house with a land registry restriction on it?

Land registry restrictions are a way of someone protecting their interest in a property.  They are common in the event of a relationship breakdown where both partners jointly own the property.

Whether or not you can sell your house with a restriction will depend on the specific restriction placed on your property.  It’s important to make sure you understand the implications of the restriction and seek independent legal advice if necessary.

Can I sell my house if I have a secured loan on it?

If you plan to sell your house with a secured loan on it, your solicitor will contact anyone who has a charge registered against the property (your mortgage company and any other company connected to loans you have secured on the property) and ask for a settlement figure. The expectation will be that any loan secured on the property will be settled in full at the time of the sale completing.

If the equity in your property is sufficient to repay both your mortgage and the secured loan, this will not be a problem.  However, if the price achieved for the property is not sufficient to repay both the mortgage and the secured loan, the sale will not be able to complete before you make alternative arrangements with the lender(s).

If you know that the sale of your property will not cover the repayment of the loan(s) secured against it, you should contact your lenders as soon as possible to make alternative arrangements. If you are able to pay off a significant amount of the loan, it may be that the lender is able to change the loan to an ‘unsecured loan’ or work with you to find a different solution.  This may be a time consuming and complex situation to resolve. It’s important to contact your lender as soon as possible to avoid the sale of your property being held up.

Can HMRC take my house if I owe tax that I can’t afford to pay?

If you have a tax liability of £5,000-plus that you are unable to pay, contact HMRC as soon as possible. If you’re not able to come to an arrangement with them, they can start bankruptcy proceedings against you.  Should that happen, any property you own is likely to be claimed as a financial asset.  Your bankruptcy receiver (the person who handles the management of your bankruptcy) will need to claim and sell assets to settle the debt with your creditors.

Bankruptcy will stay on your credit file for 6 years and can have a long-term impact on your ability to apply for credit and finance in the future. If you think HMRC, or someone else you owe money to, is likely to pursue an application to make you bankrupt, and you have equity in your property that would be able to repay the debt in full, selling your property to clear the debt may be your preferred option.

If you sell your house what happens to the mortgage?

When you decide to sell your property, your solicitor will contact anyone with a ‘charge’ on your property (a loan secured against it) to ask for a settlement figure.  This will include your mortgage and any other loan on finance secured against the property.  When the sale of your property completes, these debts will be settled before any money is released to you.

If the proceeds of the sale are not enough to repay the mortgage in full, you and your solicitor will be made aware of this when your solicitor asks the lender for a settlement figure.  You will need to come to an agreement with your mortgage lender to clear the outstanding debt. This agreement will need to be in place before the sale can continue.

If you have enough equity in you property, you could consider a quick sale to a professional home buying company. Although house buying companies don’t pay full market value, they do guarantee a sale in a quick timeframe. If you’d like to know how much a home buying company would offer to buy your house, simply complete our free, no obligation online form here.

Can I afford to sell my house to pay off debt?

If you’re considering selling property when in debt, it’s important to consider how much equity you have in your property.  Selling a house with no equity, or little equity, is not always the most sensible move. This should only be considered if you are being forced to do so by an impending repossession or threatened bankruptcy. If you are able to keep up with your mortgage repayments, your property should eventually become a substantial financial asset. If you’re struggling to pay your mortgage repayments, speak to your mortgage lender. They will be able to advise whether there are different mortgage products that might help.

Can you freeze mortgage payments if you’re struggling with debt?

If you’re struggling with debt, it may be possible to take a mortgage repayment break.  To do this you would need to have made voluntary over-payments in the past.  Speak to your mortgage lender if this is something you would like more information about.

Can I get another mortgage?

Downsizing to pay off debt can be a great option if you can clear the debt and buy another property. How easy you find it to get another mortgage after selling your house to pay off debt will depend largely on your credit score and financial history. Formal debt management solutions such IVAs (Individual Voluntary Arrangements) and bankruptcy will have an impact on your credit score. This, in turn, will have an impact on your ability to access financial credit and loans. If you decide to sell your house before you get to the point of needing formal debt management services, and there are no other ‘black marks’ on your credit file, you shouldn’t have any difficulty getting another mortgage in-line with your affordability levels.

An independent mortgage adviser will be able to give you more information relevant to your individual circumstances.

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Author:

Danny Luke

Danny Luke

As Managing Director, Danny is responsible for the overall performance of Quick Move Now and provides strategic guidance and direction to all its employees. Danny is committed to making Quick Move Now the leading and most trusted home buying company in the UK.
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