Friend in bad financial situation - sell house?

[onthinice]

I wonder if anyone could give advice that I could pass on to my friend? She has a huge amount of pressure on her from all directions and for all sorts of reasons, financial, with work, family troubles etc. I really want to help her any way I can and I'm not sure she is making the right decisions around her finances because of how stressed she is with other things.

She has a mortgage on her house, but cannot afford the monthly repayments and has debts that take up a huge chunk of her monthly outgoings. Once all bills and mortgage are paid she cannot afford food for her and her family.

It's very important to her to keep the house as she sees it as inheritance for her children in the future and would see it as a sign of failure and wasted years paying the mortgage if she were to sell and go into rented. She is however experiencing awful problems with an abusive neighbour, the house is in some level of disrepair as she doesn't have the money to maintain it, and as I said before the cost of the mortgage, on top of the debts is too much. If she sells her house she won't get another mortgage as her credit score is bad.

Would it make sense for my friend to sell up, pay off the debts, rent for a while and once she has recovered from this stressful time in her life, look at improving her credit score and potentially buying again in the future? She would have at least £100k in equity, could she put some of this in savings for the children's futures? She currently gets tax credits, so this would obviously stop if she had that level of savings, but then couldn't she use the equity to go towards her monthly outgoings in the short /medium term until she gets back on her feet and finds better employment? To me a lot of this makes sense, but my friend is so fragile at the moment I don't want to give her this advice if there are in fact loads of holes in it. Maybe I'm not seeing the full picture here. Does it seem like a reasonable suggestion? Thanks.

The risk is that she will never get on the ladder again and the equity would be swallowed up in rent.

Is she claiming all the benefits to which she's entitled?

Has she spoken to a debt charity?

Could she take in a lodger?

She hasn't wasted years paying the mortgage - that is how the equity is built up.

To be honest it doesn’t sound like she ha a huge amount of choice. If she can’t afford her mortgage, debt repayments and general living expenses, the result is that she’s going to end up in further debt. If she doesn’t act now, the choice will likely be taken from her.

She needs to speak to a debt charity. There are options before she needs to sell the house.

Also keep in mind that rent is often far more expensive than a mortgage. Selling the home is not necessarily going to make things better.

Sell the house as a last resort. Lodgers, extra jobs etc are all better options where possible.

I think better would be to seek advice from a debt charity such as Stepchange. She can probably arrange a debt management plan which would reduce her repayments on her debts and likely freeze interest too. This should free up a lot per month compared to making minimum payments, get the creditors off her back and not risk her losing her house.

I wouldn't leave the house. I had bad credit history, all off my credit files now, my credit score is excellent, but a lot of mortgage lenders ask if you have EVER had issue with credit, so the whole wait 6 years til your credit is better is rubbish imo. My history is on paper perfect now but still plenty of providers who won't lend.

I also think if she loses tax credits that 100k is gone. So then she's in a position where she has to rent, has no chance of a mortgage for at least 6 years but probably more, rent is so expensive she probably won't ever be able to save enough to buy again.

If she could leave and save the 100k then that's slightly different but if leaving means losing income then it doesn't seem to make sense because all that money from the equity will be sucked away.

Could she sell and buy somewhere smaller with lower repayments?

Could she sell and buy somewhere smaller with lower repayments?

I think this is a good idea. Gets her away from bad neighbour and her house falling into disrepair will only reduce its value. Better to sell, then downsize to buying a cheaper or smaller place.

Also think a debt charity is a good idea. They can sort out her other debts and get her a budget that will pay them off while allowing for food and other necessities.

Good fried op
Do NOT give such HUGE advice as to your friend to sell her and her children’s home.

Does she work?
How old are her children?

I cannot believe people giving advice.

It’s laughable.

Potentially losing tax credits will be hugely substantial. Depending on age if children and how many, could be £2000 a month

She could potentially lose
NI contributions to her state pension if not receiving tax credits
Council tax support cease

And that’s just for starters

At least it’s a sellers market at the moment and she’ll get a decent amount. How old is she?

Interest only
Mortgage?

No don’t sell

Rent is more expensive

Her children need stability. It could affect schools and friendships.

Also how did she accumulate the debt in the first place? If it was overspending then the likelihood is she’ll just spend the equity. However if it was through no fault of her own she could pay off her debts and then downsize so the kids still get some inheritance.

Depending on her LTV, she might be able to change to an interest only mortgage for a few years, until she’s back under control

Point her in the direction of stepchange.org, free impartial advice, there are lots of ways to move forward.

Firstly, I wouldn't move out the house, the housing market is silly and renting is more expensive than buying at the minute, also her house will go up in value gaining more equity for the future.

Get professional advice from Step Change, they will do a budget, and based on that will say what option fits best. it's not just debt management plans!

There is a reason that people do training before they are allowed to give financial advice!

As PPs have said, your friend should contact a debt advice charity - Citizens Advice would be a good one because they cover benefits, housing etc as well as debts. There's also National Debtline, Stepchange etc.

It's impossible to give the right advice without knowing more about her circumstances, income, outgoings and debts. However, as a general rule, I would explore the following:

1. Income maximisation, is she claiming all the benefits she is entitled to, would she be better off claiming UC instead of tax credits (some people are, not all obviously), are there any grants she can apply for to help with repairs/other, can she get a lodger, etc
2. What are her debts and what solutions might be suitable (DRO could be an option if she is eligible and if a debt specialist advises it after assessing all the options)
3. Reducing expenditure, is she getting the best possible deal for energy and water (including discounts for people on low incomes etc), ditto other bills and outgoings, could she make any other savings.

These short/medium term remedies might make it possible for her to stay in her house longer term, but she might need to move, if and when she can improve her credit score (which will take a while). If she can afford to move and downsize, that could be wise. But if she can't afford that, she could consider shared ownership - available properties are obviously more limited, but the advantage is that you can claim benefits for the rent portion (if eligible).

MoneySavingExpert's credit club is handy, plus there is a wealth (ha! Accidental pun) of information and advice about dealing with debt, and budgeting, on the website.

How did she get a mortgage that she can't afford? Is this actually about over-spending, budgeting issues? If so can you direct her to places which can help her reduce her spending/ economise more? Can she renegotiate her non-mortgage debts to make the figures stack up more?

As others have said, I'd also be thinking about lodgers if that would be possible - even if that means sharing bedrooms. She needs to think beyond the 'I want to give my kids an inheritance' as if she doesn't get on top of this and the house is repossessed, that will be a vanishing possibility. It sounds like you can best help her by helping her to know her options. She needs to make her own choice from the options though and be careful about being too directive about that.

She needs advice from a professional who knows the whole picture. No-one can give advice on here based on half a story.

She needs to talk to a debt advice charity like step change. She also needs to reprioritise. She should not be keeping up with credit card payments if that means she cannot afford food for her family.

Getting to that position is a trigger for needing a formal solution, unless it's just something that's caused by overspending that could be solved by cutting back on non essentials or selling anything she has that's spare.

She also needs to think about why she is in debt and can her financial situation can be turned around by proper budgeting or if something more than that is needed.

Can she free up some equity to pay her debts ?
Also extend the mortgage term ?

Thank you for all of your replies. It's good to hear other's perspectives and the suggestions. She already has a lodger, and the cramped conditions due to having to share a room with her DD is also effecting her mental health. The money is also not making enough of a difference, as something always "comes up" such as car repairs, appliances breaking etc. She really has no leeway at all for things like this.

The debt problems have accumulated over a few years, made worse in the last 18 months when her ex lost his income due to lockdown and couldn't provide any child maintenance. She has had lots of time off sick due to bereavement and other reasons and now does not get paid sick leave, but due to the stress she's under she is having time off. She wants to change her job to something full time and therefore increase her income, but is not in the right head space, she's unwell mentally /emotionally due to the various stressors.

She couldn't downsize as she has 2 kids (one boy one girl) and is in a3 bed, she also lives in one of the cheaper areas of the city already. Her children are getting older and it won't be long until tax credits reduce and a couple of years later they'll stop completely, so will child maintenence payments.

Although rent is more expensive, it would still be a lot less than her mortgage + debt repayments.

I heard about step change recently and suggested she get in touch. She feels she has had good enough advice from the lady from her mortgage lender and seemed a bit defeated about the possibility of anyone being able to help.

I won't suggest selling the house (wasn't going to at the moment as she's so fragile, but was thinking it could be a suggestion when she's feeling stronger - I'm glad I asked on here).

My husband works for stepchange and they'll help her to decide what is the best way forward for her. It's a free service and only takes a phonecall. I would suggest that the advice from the mortgage company won't be completely neutral.

YY, a charity like Citizens Advice or StepChange should be much more helpful and should be able to look at the whole picture.

"She has had lots of time off sick due to bereavement and other reasons and now does not get paid sick leave, but due to the stress she's under she is having time off."

"she's unwell mentally /emotionally due to the various stressors."

If she's on unpaid sick leave with no income, it's no wonder she's getting into debt.

She is probably eligible to apply for new-style ESA (provided she made enough NI contributions between April 2018 and April 2020)
www.citizensadvice.org.uk/benefits/sick-or-disabled-people-and-carers/employment-and-support-allowance/help-with-your-esa-claim/check-if-you-can-claim-esa/

It would also be worth checking whether she would be better off switching from tax credits to UC, as I said, and she should ask Citizens Advice to do a "better off" benefit calculation to compare the options.

Also see www.moneysavingexpert.com/credit-cards/mental-health-guide/

I would suggest that she applies for a "breathing space" which means that she can put her debt repayments on hold, interest will be frozen and no collection action will be taken, while she seeks debt advice. Obviously she would need to continue paying her mortgage, Council tax and other essential bills during this time (ongoing payments, not arrears).
www.nationaldebtline.org/fact-sheet-library/breathing-space-ew/

@Judgedbycats that's what I thought about the mortgage company. I will definitely reiterate step change to her.

@AnotherEmma thank you for your post, lots of useful info there that I can share/ explore with her.

If these are unsecured debts then she needs StepChange. She'd be better off with a payment plan on these. F her credit is already poor she has little to lose.
Get over to money saving expert. Lots of good advice there about these issues.
Is she on a fixed term for her mortgage rate? If so how long does it have to run? She may need to be careful she doesn't end up on a higher interest rate