Downsizing your home to pay off debt – is it worth it?

Downsizing your home to pay off debt might seem as a viable plan to finally breathe freely in a job market that struggles with jobless workers and long term unemployment in the wake of the Covid-19 pandemic. Moving to a less expensive home can enable you to get in grips with your financial situation, especially if you are paying off a big mortgage. 

So, if you need funds as soon as possible, you might want to consider selling your property and buying a smaller home. Since eviction filings have increased recently, you may not want to wait to get yourself into such a problem at your current place of residence. For this reason, read on to find out if downsizing is the right decision for you.

Try to take control of your debt

It is not every day that one sells their home. It is certainly a huge financial and personal decision you have to reach and then follow through, which is why it makes sense to take into consideration other options before making the final decision. Essentially, there are ways you can take control of your debt when it starts to ‘corner you’ financially. 

Since each situation is different, the first thing to do is to consult debt charities where you can get free advice on how you should approach your debt. You will also be offered help with assessing your income and spending, after which you will be able to make up a viable spending plan that will allow you to get things back on track. 

You could finance your repayment scheme by selling your home and moving into a smaller one.

A Debt Management Plan 

If your spending cannot be reduced to something that would make a difference, you can get help with devising a debt management plan (DMP). The essence of DMP entails making an informal agreement that you will commit and pay off a set monthly sum that will be equally divided between your creditors and any other people or institutions that have granted you a loan. 

The DMP is typically oriented towards paying off non-priority debt such as credit card debt and personal loans. So, any mortgages or utility bills that you have not paid do not fall into this debt plan. Also, since this is an informal agreement, you and your creditors are not legally obliged to follow through with the plan every month.

A debt management plan does not legally bind debtors to return money.

Individual voluntary order (IVA)

If your debt becomes more serious, then you might want to construct an individual voluntary order before you opt for downsizing your home to pay off debt. The IVA is different from DMP as it is legally binding, which means there are higher stakes involved. Although it can be quite costly to set up, the upside is that you do not have to sell your property. 

This form of insolvency control can last from 5-6 years. Within this time period, you will have to pay off your debt regularly and with the amount of money you can afford to give. However, in case your debt is not cleared by the end of this period, it is wiped out. 

Take note that you will be listed on the Individual Insolvency Register throughout this time period and 3 months after the agreement has ended, which means you might encounter some difficulties with getting another loan grant. 

How to decide if you should sell your property or not?

If the proposed debt control plans are not an option, you should still ask yourself a few questions that will allow you to come to a financially sound decision. So, you need to come to grips with current and potential outgoings and incomings in order to get closer to see if selling your home to pay off your debt is really worth it. Let’s take a look at what you need to pay attention to.

Is the value of your home high enough?

First and foremost, it is best if you consult your financial and real estate advisors and find out if selling your property is actually enough to pay off your debts. However, if you have an impending home mortgage that also needs to be covered, the value of your property may not be enough once you pay off this mortgage loan. 

If you pay off your debt, will you have enough money to purchase a smaller home?

So, as we have mentioned, the decision will depend on the amount of money you are left with after paying off your debts and your mortgage. You might want to scout for homes that fit your budget prior to selling your home and paying off your debt, just so that you have a clear idea as to how much money you might need to follow through with this plan. 

You can also opt for renting a place for the time being until you collect the financial means to purchase a smaller home. 

Some people might prefer to take out a new mortgage, but in this case you have to be well-informed as to the conditions under which you are eligible to do so. Only then can you actually start to consider buying and relocating to a smaller home. 

Sell your house only when you are certain you will be able to pay off your debts, mortgage, and your new home.

Alt: a key in a lock of a new home

Since you will have gone through a true financial Golgotha by the time you sell your home, buy a new one, and start packing your belongings, you will probably feel accomplished and thankful because everything has come to an end. However, we advise you to still hold your ground and choose your moving company wisely. Avoid unexpected events with unpleasant consequences by hiring experts from New Leaf Moving Group, who can deal with the entire process in an effective way.

All in all, we hope this short article on downsizing your home to pay off debt has allowed you to get a clearer impression of what might await you in the future. Whatever you finally choose to do, we wish you the best of luck in your financial endeavours!