Selling Your Home to Pay off Debt

If you’re overwhelmed by debt, you might consider selling your home to free up cash. But what happens after you sell? Many homeowners assume they need 20% down to buy another property, but that’s not necessarily true. 

In Canada, you can purchase a new home with as little as 5% down, allowing you to use the rest of your proceeds to pay off debt and regain financial stability.

Here’s how this strategy can work for you.

Why sell to pay off debt?

Debt—especially high-interest credit cards, lines of credit, or personal loans—can be a major financial burden. If your home has appreciated in value, selling can give you the funds needed to eliminate or significantly reduce your debt, lowering your monthly obligations and improving your financial health.

Key benefits of this approach include:

Lower monthly expenses – Paying off debt means fewer monthly payments and less financial stress.
Better credit score – Reducing debt improves your credit, making future borrowing easier and more affordable.
More financial flexibility – Without the burden of excessive debt, you can focus on saving and investing.

Rebuying with a smaller down payment.

One of the biggest misconceptions in home buying is that you need a 20% down payment. In Canada, you can purchase a home with as little as:

• 5% down for homes up to $500,000
• 5% on the first $500,000 and 10% on the portion above $500,000 for homes up to $1,500,000

The catch? If you put down less than 20%, you’ll need to pay for mortgage default insurance (CMHC, Sagen, or Canada Guaranty), which protects the lender but allows you to qualify with a smaller down payment.

What does this look like in a real-life scenario? Here’s an example:

Let’s say you sell your home and walk away with $150,000 after paying off your existing mortgage and selling costs. Instead of putting the full amount toward a new home, you could:

• Use $25,000 as a 5% down payment on a $500,000 home
• Put $125,000 toward paying off debt

This strategy leaves you with significantly reduced debt while still allowing you to own a home.

There are some critical considerations.

Before deciding to sell, consider the following:

🔹 Market conditions – Are you selling in a seller’s market where you’ll get top dollar? What’s the price of homes in your target area?
🔹 Closing costs – Remember to budget for realtor fees, legal fees, and property transfer tax when buying again.
🔹 Mortgage prepayment penalties – Check with your lender to see if you’ll incur any penalties for breaking your current mortgage and paying it off early.
🔹 Affordability – With reduced debt, your new mortgage may be easier to manage, but ensure you’re still buying within your means.

Is this the right move for you?

Selling your home to pay off debt and re-entering the market with a lower down payment can be a great financial move. However, it’s important to work with a mortgage broker who understands your situation and can guide you through the process.

If you’re considering this strategy, let’s connect and explore your options! This may be the exact opportunity that you’re looking for. Give me a call at 250-826-3111, apply on my website or contact me through my online contact form to start the process today.