What are the potential financial implications of selling a house with mortgage arrears?

The financial implications of selling a property while mortgage payments are overdue depend on the type of property, the lender’s requirements, the reason for the arrears and the amount of value available after completion. The headline sale price is not the same as the amount you will ultimately retain, so a proper financial assessment should include tax, transaction expenses, early repayment terms and any continuing liability.

Early repayment and exit charges

Your mortgage offer may contain an early repayment charge, particularly if you are within a fixed-rate, discounted or tracker period with special repayment conditions. This charge is separate from ordinary conveyancing expenses and should be confirmed with the lender when requesting a redemption statement. Some mortgages also include administration costs for changing the repayment arrangement or handling a sale.

Ask the lender for an up-to-date redemption statement rather than relying on the balance shown on a previous statement. It should show the amount required to clear the mortgage on a specified completion date and identify any charges that may change before completion. If the sale is delayed, a revised figure may be needed.

The difference between the asking price and your net proceeds

A property may appear to have sufficient value when compared with the mortgage balance, but the amount available to you can be lower after professional and administrative expenses. These can include:

• conveyancing and property solicitor fees;
• estate agency commission, if an estate agent is used;
• an Energy Performance Certificate where one is required;
• valuation, compliance, repair or clearance costs agreed during the sale;
• removal, storage and temporary accommodation costs; and
• fees connected with dealing with additional secured debts or restrictions on the title.

Where a buyer proposes a lower price in return for a simpler transaction, compare the resulting net figure with the likely proceeds from a conventional sale after all fees and the cost of delay have been considered. A lower offer is not automatically the more expensive option, but it should be assessed against the actual amount needed to resolve the mortgage position.

Tax considerations

Selling your main home will often be treated differently from selling a property held as an investment or second home. Private Residence Relief may reduce or eliminate Capital Gains Tax on a qualifying main residence, but the treatment depends on factors such as periods when the property was not your main home, letting, ownership history and whether it was acquired for business or investment purposes.

If the property is a buy-to-let, holiday let or second home, a gain may be taxable after allowable deductions and available reliefs. The relevant gain is generally based on the increase in value rather than the cash you receive after repaying the mortgage, so a mortgage balance does not by itself remove a possible tax liability. Obtain advice from a tax professional before agreeing the sale if the property is not solely your main residence.

What happens if the sale does not clear everything owed

If the available sale proceeds are insufficient to settle the lender’s required amount and other amounts secured against the property, the lender may need to approve the transaction. It may ask for a separate repayment arrangement, a contribution from another source or evidence that the remaining balance will be dealt with. Do not assume that handing over the keys or completing a sale removes liability for any balance that remains.

Where other debts are involved, taking money from a sale to pay one creditor may affect the position of others. Anyone facing a possible shortfall should obtain independent debt advice and ask their solicitor to explain the order in which secured and unsecured liabilities will be addressed.

Joint owners, separation and insolvency

With joint ownership, the distribution of the remaining proceeds will depend on the legal ownership structure, any declaration of trust and agreements between the owners. A separation does not normally change the lender’s rights under a joint mortgage. Both borrowers may remain responsible for the mortgage until it is redeemed or formally transferred.

Additional complications can arise if one owner is bankrupt, subject to an individual voluntary arrangement or has enforcement action registered against them. Restrictions, charging orders or insolvency rules may affect whether the sale can proceed and how the proceeds are distributed. Specialist legal advice is appropriate in these circumstances.

Effect on future borrowing

Although the sale itself can resolve the secured borrowing, a history of missed payments may remain relevant when applying for future credit, renting a property or arranging another mortgage. Lenders may also ask whether any balance was left after the sale and whether a formal repayment plan was agreed. Keep copies of the redemption statement, completion statement and written confirmation of how any remaining balance is being handled.

Before accepting an offer, request the current mortgage figures, list every cost connected with the transaction and check whether tax advice is required. A solicitor or regulated debt adviser can then help you establish whether the proposed sale will leave you with funds, a manageable residual debt or a need to negotiate with the lender before completion.