Selling a property can sometimes appear to be the most straightforward way of dealing with mortgage arrears. If a homeowner or landlord has fallen behind with mortgage payments, selling the property may release enough money to repay the mortgage and bring the financial problem to an end.

However, selling a property does not automatically mean that all mortgage arrears disappear.

What happens to the arrears depends largely on the amount owed to the lender, the property’s sale price, any other secured borrowing and the costs associated with the sale. In some cases, there may be enough equity to repay everything owed. In other situations, the sale proceeds may not be sufficient, leaving the borrower with a mortgage shortfall after the property has been sold.

Understanding this distinction is particularly important for anyone considering a sale because of financial difficulties.

Can Selling Your Property Clear Mortgage Arrears?

In many cases, selling a property can provide the funds needed to repay the mortgage, including outstanding arrears.

For example, suppose a property is worth £300,000 and the total amount owed to the mortgage lender is £190,000, including £5,000 of arrears.

If the property is sold for £300,000, there may be sufficient funds from the sale to repay the mortgage and arrears, subject to the costs and other amounts that need to be paid from the transaction.

The important figure is therefore not simply the amount of arrears.

The lender will normally need to be repaid the total amount required to redeem the mortgage, together with any applicable charges and other amounts properly due.

This is why a homeowner should obtain an up-to-date redemption figure from the lender before assuming that a particular sale price will be sufficient.

What Is a Mortgage Redemption Figure?

A mortgage redemption figure is the amount required to repay the mortgage in full at a particular date.

The figure can be different from the balance shown on an ordinary mortgage statement because it may take account of interest, applicable charges and, depending on the circumstances, early repayment charges or other amounts.

The exact figure can also change over time.

For someone selling a property because of mortgage arrears, obtaining an accurate redemption statement is therefore an important part of understanding whether the proposed sale will actually clear the mortgage.

A borrower should not simply take the property’s estimated market value and subtract the mortgage balance shown on an old statement.

The figures need to be brought up to date.

What Happens If There Is Enough Equity?

If the property is worth substantially more than the total amount required to repay the mortgage and other secured debts, the sale may be able to clear the mortgage arrears and leave money remaining for the owner.

For example, imagine a property valued at £400,000 with a mortgage redemption figure of £220,000.

If the property sells for approximately £400,000, there may be significant equity after repayment of the mortgage, although selling costs and any other liabilities secured against the property also need to be considered.

In this situation, selling voluntarily may allow the owner to resolve the mortgage problem while retaining whatever legitimate equity remains after the necessary deductions.

The exact figures will depend on the transaction.

What If the Property Is Worth Less Than the Mortgage?

The situation becomes more difficult where the property’s value is less than the amount owed to the lender.

This is commonly described as negative equity.

MoneyHelper explains that negative equity occurs when the amount owed on the mortgage is greater than the property’s value. If the owner needs to sell, they may have to find another way to pay the difference to the lender.

For example, suppose a property is worth £200,000 but the mortgage redemption figure is £225,000.

There is a £25,000 difference before taking account of other sale costs.

Selling the property for £200,000 therefore does not automatically eliminate the mortgage debt.

The borrower may still need to deal with the remaining £25,000 and any other applicable amounts.

What Is a Mortgage Shortfall?

A mortgage shortfall occurs when the money obtained from selling the property is not enough to repay the amount owed to the mortgage lender.

This can happen following either a voluntary sale or a repossession.

For example, if the total mortgage debt and relevant costs amount to £250,000 but the property sells for £220,000, there may be a £30,000 shortfall.

The fact that the property has been sold does not necessarily mean that the outstanding debt has disappeared.

This is particularly important for borrowers who believe that handing the property back or allowing it to be sold will automatically bring the mortgage to an end.

MoneyHelper specifically warns that handing back the keys does not necessarily remove responsibility for the mortgage or any outstanding balance if the sale proceeds are insufficient.

What Happens to Mortgage Arrears When the Property Is Sold?

When a property is sold and the mortgage is redeemed, the outstanding mortgage debt, including any properly due arrears, is normally dealt with from the transaction proceeds.

The conveyancing process will usually involve obtaining the lender’s redemption figure and arranging for the mortgage to be discharged on completion.

If the sale proceeds are sufficient, the mortgage can be repaid in full.

If the proceeds are insufficient, however, a shortfall can remain.

The key point is that selling the property and repaying the mortgage are related but not necessarily identical outcomes.

A borrower should therefore establish the exact amount required to redeem the mortgage before deciding that a sale will solve the problem.

What If the Property Is Already in Mortgage Arrears?

Being in arrears does not necessarily prevent a homeowner from selling the property.

In fact, where the property has sufficient equity, a voluntary sale may sometimes be a way of resolving the mortgage debt before the situation progresses further.

The borrower should communicate with the lender and explain what is happening.

MoneyHelper advises borrowers who are struggling with mortgage payments to contact their lender as soon as possible. It also explains that lenders should make reasonable attempts to reach an agreement with borrowers experiencing payment difficulties.

The lender may also need to be involved in the sale process, particularly where possession proceedings have already started or where there are concerns about whether the sale will repay the mortgage in full.

Should You Tell the Lender That You Want to Sell?

If mortgage arrears already exist, it is generally sensible to communicate with the lender rather than allowing the situation to continue without explanation.

A borrower who is considering selling should explain the circumstances and, where appropriate, provide information about the proposed sale.

The FCA recognises that customers in mortgage arrears may need support and has specific rules concerning how firms should deal with customers in arrears and situations involving a sale shortfall.

This does not mean that the lender has to agree to every proposal made by the borrower.

However, open communication can help establish what needs to happen for the mortgage to be redeemed and whether there are any issues that could affect the proposed sale.

What If the Lender Has Already Started Repossession Proceedings?

This can make the situation considerably more urgent.

A borrower should not assume that simply putting the property on the market automatically stops possession proceedings.

If court proceedings have already begun, the borrower needs to understand the stage that the proceedings have reached and communicate appropriately with the lender and, where necessary, obtain independent legal advice.

Our guide How Many Mortgage Payments Can You Miss Before Repossession in the UK? – Immediate Bank Claims explains how mortgage arrears can progress towards repossession.

A voluntary sale may still be possible in some circumstances, but the lender’s position and the court proceedings need to be considered carefully.

Is Selling Voluntarily Better Than Repossession?

There is no universal answer because every financial situation is different.

However, the FCA has warned that borrowers struggling with mortgage payments should be cautious about simply allowing a property to reach repossession when a voluntary sale may be possible.

The FCA explains that a lender may be able to help a borrower sell the property and that a properly managed sale may result in a better sale price while potentially reducing legal, arrears and possession costs.

This does not mean that every homeowner should sell.

The important point is that someone facing serious arrears should understand the available options before the situation becomes more difficult.

Our detailed guide Mortgage Repossession Process in the UK: What Happens From Start to Finish – Immediate Bank Claims explains the broader repossession process and what can happen when mortgage arrears progress to court action.

What If the Property Has Significant Equity?

Significant equity can make a voluntary sale more attractive because there may be enough money to repay the mortgage and leave funds for the property owner.

For example, imagine a property worth £500,000 with a total mortgage redemption figure of £280,000.

Even after allowing for reasonable selling costs, there may be substantial equity remaining.

If the owner is struggling with mortgage payments, selling may therefore be capable of clearing the mortgage debt while preserving some of that equity.

However, the owner should obtain realistic information about the property’s likely sale price rather than relying on an optimistic valuation.

A property that is advertised at £500,000 is not necessarily going to sell for £500,000.

What If There Is Little or No Equity?

The position is more complicated where the property is worth approximately the same as the mortgage debt.

Suppose the mortgage redemption figure is £300,000 and the property is likely to sell for around £305,000.

At first glance, this appears to be enough to clear the mortgage.

But once estate-agent fees, legal costs and other selling expenses are taken into account, the remaining amount may be insufficient.

The borrower therefore needs to look at the net proceeds, not simply the gross sale price.

This is another reason why an up-to-date redemption figure and realistic selling costs should be obtained before deciding what to do.

What If There Is a Mortgage Shortfall After the Sale?

If the property sells for less than the amount required to repay the mortgage, the remaining balance may become a separate debt owed to the lender.

The precise legal and financial position can depend on the mortgage terms, the type of mortgage, how the property was sold and the circumstances surrounding the shortfall.

This is why borrowers should not assume that selling a property automatically writes off an outstanding mortgage balance.

MoneyHelper similarly warns that where a property is sold in negative equity, the owner may need to find another way to pay the shortfall.

Anyone facing a potential shortfall should obtain appropriate advice before proceeding.

Can the Lender Stop You From Selling?

A borrower generally needs to deal with the mortgage lender’s security over the property when selling.

The mortgage cannot simply be ignored.

The lender will need to be repaid according to the terms applicable to the mortgage, normally through the conveyancing process.

Where the proposed sale price is insufficient to redeem the mortgage, additional issues can arise.

The lender may need to consider whether it is prepared to accept the proposed sale and how any remaining shortfall will be dealt with.

This makes it particularly important to communicate with the lender before committing to a sale where there is a possibility that the proceeds will not cover the mortgage.

What About a Buy-to-Let Property?

Landlords can face the same fundamental issue.

Suppose a buy-to-let property is worth £350,000 but the landlord owes £250,000 on the mortgage and has accumulated £8,000 of arrears.

If the property is sold for £350,000, the mortgage may be capable of being cleared from the sale proceeds, subject to the redemption figure, selling costs and any other secured debts.

But if the property sells for only £245,000, there may be insufficient funds to clear the mortgage completely.

The landlord could then face a shortfall even though the property has been sold.

For landlords, rental income should also be considered when deciding whether selling is genuinely necessary. A temporary cash-flow problem may sometimes be capable of being addressed without selling the property, depending on the circumstances.

Should You Accept a Quick-Sale Offer?

Extreme caution is needed here.

A homeowner in mortgage arrears may receive offers from companies or investors promising to purchase the property very quickly.

The attraction can be obvious: a fast sale may appear to offer a way to avoid repossession and clear the mortgage.

However, a quick sale can also mean accepting substantially less than the property’s true market value.

The FCA warns that some quick-sale companies target people who are behind with mortgage payments and may offer to purchase properties at significant discounts.

A quick sale is not automatically wrong, but homeowners should understand exactly what they are being offered and compare it with realistic market alternatives.

Someone under pressure should be particularly careful about making a major financial decision simply because a buyer promises to complete quickly.

What About Sale and Rent Back?

Another proposal sometimes encountered by homeowners in financial difficulty is a sale-and-rent-back arrangement.

This involves selling the property but remaining in it as a tenant.

It can appear attractive because the homeowner receives money from the sale while continuing to live in the property.

However, there are significant risks.

MoneyHelper explains that sale-and-rent-back schemes can involve selling the property at a discount, future rent increases and the possibility of having to leave the property when the tenancy ends.

Anyone considering such an arrangement should obtain independent advice and check that the firm involved is properly authorised where required.

What If You Want to Sell but Cannot Find a Buyer?

A property being placed on the market does not guarantee that it will sell quickly.

This can be particularly problematic when mortgage arrears are continuing to accumulate.

Interest and other charges may continue to affect the amount required to redeem the mortgage.

The longer the property remains unsold, the greater the risk that the financial position will change.

For this reason, anyone considering a voluntary sale because of mortgage arrears should not assume that simply instructing an estate agent resolves the problem.

The lender should be kept informed, and the borrower should continue to consider what can realistically be afforded while the property is being marketed.

What Happens If the Property Is Repossessed Instead?

If the property is ultimately repossessed and sold by the lender, the sale proceeds will normally be applied towards the amounts owed.

If the sale price is insufficient to cover the mortgage debt and relevant costs, a shortfall may remain.

This is one of the most important reasons why borrowers should understand the financial consequences of repossession rather than assuming that losing the property ends the debt.

The possibility of a shortfall means that early action can sometimes be financially important.

A Practical Example

Consider a property worth £350,000.

The homeowner has a mortgage balance of £270,000 and £10,000 of arrears. The lender provides a current redemption figure of £283,000 after taking account of the relevant amounts due.

If the property sells for £350,000, there may be sufficient funds to repay the mortgage in full and leave equity after selling costs.

Now imagine that the property is worth only £275,000.

A sale at that price may not be sufficient to repay the full redemption figure once selling costs are considered.

The homeowner could therefore face a shortfall after completion.

The key lesson is that the amount of arrears alone does not determine whether selling will solve the mortgage problem.

The property’s realistic sale value, the full redemption figure and the costs of selling all need to be considered.

Should You Sell Your Property to Clear Mortgage Arrears?

There is no universal answer.

For some borrowers, selling a property with sufficient equity may be a practical way of clearing mortgage debt and avoiding further arrears.

For others, selling may leave a substantial shortfall or may not be necessary if another sustainable solution can be reached with the lender.

The decision should therefore be based on the complete financial position rather than simply the fact that mortgage arrears exist.

A borrower should establish how much is owed, what the property is realistically worth, what costs would arise from selling and whether the sale would actually resolve the debt.

What Should You Do Before Putting the Property on the Market?

Before making a decision, obtain an up-to-date mortgage statement and redemption figure.

Establish the property’s realistic market value rather than relying on a single optimistic valuation.

Calculate the likely selling costs and determine whether there are any other mortgages or secured charges over the property.

You should also speak to the lender and explain your circumstances, particularly if arrears already exist or possession proceedings have begun.

If the property is likely to sell for less than the amount required to clear the mortgage, obtain appropriate advice before proceeding.

Conclusion

Selling a property can sometimes be an effective way to deal with mortgage arrears, particularly where there is enough equity to repay the mortgage in full.

However, selling the property does not automatically eliminate mortgage arrears or the mortgage debt.

The critical question is whether the net sale proceeds will be sufficient to meet the lender’s redemption figure and any other amounts that need to be paid.

Where there is insufficient equity, a mortgage shortfall may remain after the sale. MoneyHelper confirms that homeowners in negative equity may need to find another way to cover the difference between the property’s value and the mortgage balance.

Anyone considering selling because of mortgage arrears should therefore obtain accurate figures before making a decision.

It is also important to be cautious about quick-sale offers, sale-and-rent-back arrangements and any proposal that appears to solve the problem simply because it promises speed.

If mortgage arrears have already progressed towards repossession, the situation can become more urgent. Understanding the available options early may help a borrower make a more informed decision about whether to sell, negotiate with the lender or consider another solution.

Disclaimer

Immediate Bank Claims is not a firm of solicitors or barristers. We provide independent support, guidance and assistance in matters relating to property repossession, mortgage arrears, LPA Receivers, debt matters and related issues. This article is provided for general information only and should not be treated as legal or financial advice. Individual circumstances vary, and appropriate professional advice should be obtained where necessary.