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Mortgage a property in probate
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There are a number of reasons why you may want to mortgage a house in probate – the legal process where a will is certified in court.
You may be the benefactor who wants to replace the current mortgage that isn’t in your name, raise capital on a mortgage-free property, or perhaps you’re looking to use a mortgage to purchase an estate being sold in probate.
You may have inherited a mortgaged property as well as cash, in which case an advisor could help you assess your options including remortgaging the property. You could use the cash inheritance to pay off the mortgage or invest it elsewhere and get a new mortgage. With rates being so competitive it’s questionable whether you should use an inheritance to pay off a mortgage however, especially if it’s a small loan. There’s also the option of using the inheritance to buy another house if you were thinking of becoming a more serious property investor.
Going through probate takes around six months depending on complications that can arise, so if you’re a beneficiary patience is a virtue. Whatever you're looking to do there are certain considerations you need to make:
- Inheritance Tax
- Impact of Probate on property value
- Inheriting a mortgage
- Remortgage an inheritance mortgage
- Renting out an inherited property
- Handling multiple beneficiaries
Mortgages and inheritance tax
If there is inheritance tax to pay that can hold things up. The executors (those responsible for carrying out the instructions of a will) have plenty of work to do that can hold things up. They need to collect mortgage and title documentation and ascertain whether the borrower has life insurance, which might mean a mortgage on the property (if it has one) is covered for a period of time.
The executors, who can use legal advisers in complex cases, also need to value the property by instructing a chartered surveyor.
As you may have gathered this process takes time, and the house may be left sitting empty for a while. Therefore it’s not a bad idea to take out unoccupied home insurance in case the place floods, is burgled or is damaged some other way during this interim period.
A tax of 40% is charged on estates worth more than £325,000, (or up to £650,000 on the second death of a married/civil partnership couple) which is why it can make sense for someone looking to pass on a sizable inheritance to have a mortgage from an inheritance tax perspective.
In an example scenario if you had a £400,000 property with a 20% mortgage the value being passed on would fall to £320,000 – under the threshold. Then if you gifted the £80,000 withdrawn from the property and lived for seven years it would be passed on tax-free.
It should be noted you cannot buy or be gifted your parents’ house to avoid inheritance tax. The same £325,000 threshold rule applies if they are alive on homes, so gifts to eventual beneficiaries should be made in the form of cash.
Probate value versus market value
When the home is valued for probate it’s based on the open market value of the property, not including any oddities, for example, if someone is willing to pay a premium. Therefore if the property is sold while the probate process is going on buyers can get a good deal and beneficiaries can get their share with minimum fuss.
If you were wondering how to buy a probate property it’s typically handled by estate agents, though it can be done privately if you know the seller. The downside for the buyer is there is an increased risk of a delay on completion, so if using a mortgage they need to pay extra attention to the length of time the mortgage offer is valid for.
There are a number of reasons why you may want to sell, which happens around half the time homes are inherited. It could be financial – you can’t afford to repay the mortgage – or sentimental because you may not want to own a home that belonged to your deceased relative without them.
Sellers can get an ‘emergency grant of probate’ that allows the property to be listed after 10-14 days.
Handling a mortgage inheritance
While a mortgaged home is going through probate lenders will still charge interest on the property. However typically they will allow this to roll into arrears without penalty providing they are kept in the loop about the process. The executors can deal with the payments themselves by arranging them to be paid from the dead person’s estate.
If you are inheriting a buy-to-let property with tenants living inside the rent needs to be paid to the executors, as the deceased homeowner will have their bank account frozen when they die.
Swapping an inheritance mortgage with a new mortgage
If you want to retain the property and keep a mortgage on it you, the new borrower, should consult a mortgage advisor. One option may be to stay with the same lender, in which case you would need to renegotiate terms with the lender once probate has been granted. In some cases lenders will waive any early repayment charges, but the new applicants would need to meet the normal lending criteria in terms of loan-to-value, income, affordability and credit history.
One stumbling block could be affordability stress tests, where lenders test whether you can afford to pay the mortgage both at the current interest rates and if the Bank of England raises interest rates. These days, passing these checks isn’t a walk in the park.
Ever since the Financial Conduct Authority introduced the Mortgage Market Review in 2014 residential mortgages have been stress tested by the impact a 3% interest rate rise would have on a lender’s standard variable rate.
Here’s an example scenario: Someone borrowing £100,000 over 25 years on a rate of 3% would, with some lenders, need to prove they can afford the monthly payments at 6%, so disposable income would need to cover £645 per month instead of the actual payment of £475.
There are exceptions to this rule – If the mortgage is a fixed rate for at least five years, lenders can technically apply their own stress tests – but they still usually test mortgages against a higher interest rate.
When assessing affordability lenders would check your income was acceptable in terms of sustainability, how long you’ve been in your job and how you’re paid. It may be you’ll need a specialist lender if for instance you’ve been self-employed a short while, are a contractor or a temporary worker, or are earning irregular income.
They’d also scrutinise your credit history by looking at whether you have County Court Judgements or defaults against your name, which could rule you out from being able to use mainstream lenders. However, even if you’ve had credit issues as recently as yesterday, there may still be lenders out there for you depending on the severity of the issue and your overall circumstances. For the latest on getting a mortgage with bad credit read our article.
Renting out an inherited property with a buy-to-let mortgage
If you want to get a buy-to-let mortgage on a property you’ve inherited you’ll be faced with more challenges, so speaking to an advisor has never been more crucial in this space. At the start of 2017 the Bank of England’s Prudential Regulation Authority ordered mortgage lenders to get tougher when assessing whether buy-to-let landlords can repay their mortgages if interest rates rise.
While this doesn’t affect every lender, would-be landlords tend to be assessed more strictly nowadays based on their income and what rental returns they can reasonably expect to get.
Here’s the current situation:
- To ensure you can afford to repay the mortgage some buy-to-let lenders require 145% rental cover and others require cover at 125%.
- Being stress tested at 125% is more common if you take a mortgage out through a limited company, which has become increasingly popular with landlords in the past couple of years.
- Buy-to-let mortgages are currently stress tested against a rate between 5 and 5.5%, though some lenders use the actual pay rate providing they have sufficient rental coverage.
While buy-to-let has become a more complicated market in the past few years it’s still a buoyant one with fantastic mortgage rates available. For the latest on the challenges and rewards of buy-to-let read our latest article. As ever we recommend making an enquiry to help you navigate through this market.
You’ve inherited a house with no mortgage
If you inherit a mortgage-free property and decide to retain it, you could choose to mortgage it to release capital, whether or not you want to live in it yourself or rent it out. This is only meant to take place once you have been an owner for six months based on most lenders’ policies. However, in practice a number of lenders are happy to waive the six month rule due to the extenuating circumstances. If you are looking to refinance an inherited property, then make an enquiry and we’ll refer you to one of the specialists.
Sometimes things are not so simple and the property is left to multiple benefactors, in which case you each need to decide what to do with your share. Wondering how to buy out your siblings in the inherited home? You could arrange to buy their share and take out a new mortgage with an advisor, who would contact the lender on your behalf.
You may also want to take out a mortgage with other beneficiaries, in which case a broker’s expertise would really come into their own as some lenders are willing to lend on mortgages with multiple applicants (up to four) and others aren’t. In this scenario every situation is different – feel free to speak to one of our experts to find out the options available.
The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.
Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage.
Looking for specialist advice? Read through our articles about different types of remortgage situations, and how best to prepare yourself to find the right mortgage for you