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HouseWorth
© GetAgent Limited 2024
  1. Blog
  2. Inheriting a house with a mortgage
House selling tips
31 March 2023

Inheriting a house with a mortgage

Fatima Bukhari
Writer & Researcher

Table of contents

  1. 1. Who is responsible for paying off the mortgage?
  2. 2. What are the legal obligations of an inheritor?
  3. 3. What happens to the assets?
  4. 4. Inheritance tax
  5. 5. Do you have to pay Capital Gains Tax on an inherited property?
  6. 6. Dealing with the lender
  7. 7. Dealing with a mortgage
  8. 8. Can you afford to inherit a house with a mortgage?
  9. 9. What if they had a life insurance policy?
  10. 10. What are probate laws?
  11. 11. Summary: Don’t do it alone!

Inheriting a house with an existing mortgage can be a stressful process, especially if you’re not familiar with the ins and outs of mortgages and property ownership. When a loved one passes away, inheriting a property can bring both emotional comfort and financial responsibility, but inheriting a property with an outstanding mortgage can be challenging.

Who is responsible for paying off the mortgage?

Inheriting a property with a mortgage in the UK means taking on the responsibility for the mortgage payments, regardless of whether you reside in the property or not. It's important to notify the mortgage lender of the previous owner's passing as soon as possible, since many lenders offer a grace period for mortgage repayments.

As the new owner, it's essential to ensure that you fulfil all mortgage payment obligations to avoid any penalties or legal action by the lender. You should be able to understand your financial situation and assess your ability to repay the mortgage.

It’s worth seeking professional advice and checking the mortgage terms of the lender. Seeking professional advice can be helpful in making informed decisions about the inherited property’s future.

As an inheritor of a property, you have certain legal obligations that must be fulfilled. Here are some of the most important ones:

  1. Notify the relevant parties: As soon as you inherit the property, you must notify the mortgage lender, any insurance providers, and the local council about the change in ownership.
  2. Pay off outstanding debts: If there are any outstanding debts or bills associated with the property, such as the remaining mortgage or property taxes, it’s your legal obligation to pay them off.
  3. Follow the deceased's will or the laws of intestacy: If the deceased left a will, you’ll need to follow its instructions regarding the distribution of the property and assets. If there’s no will, you need to follow the laws of intestacy, which govern how the estate will be distributed.
  4. Maintain the property: As the new owner of the property, you’re responsible for its upkeep and maintenance. This includes regular repairs and ensuring that the property meets any legal standards for safety and habitability.
  5. Make informed decisions: As an inheritor, it’s important to make informed decisions about the property's future. This may involve seeking professional advice and carefully considering your financial situation.

What happens to the assets?

When you inherit a house with a mortgage, you’ll also inherit any other assets that come with the property, such as furniture or appliances. However, you’ll also inherit any liabilities associated with the property, such as an outstanding mortgage debt, property taxes, or maintenance costs.

If you do end up deciding to keep the property, you’ll need to take over the mortgage payments and other financial responsibilities. This might include refinancing the mortgage in your own name or negotiating with the lender.

If you decide to sell your property, any proceeds from the sale will first be used to pay off any outstanding mortgage debt and other liabilities. Remaining funds will then be distributed according to the deceased’s will or according to the Laws Of Intestacy if there’s no will.

Do you have to pay Stamp Duty Land Tax?

When you buy a property or land in the UK, you're required to pay a property tax known as Stamp Duty Land Tax. However, if you inherit a property through a will, you won't have to pay stamp duty. Instead, you'll need to pay inheritance tax on the property.

Inheritance tax

The amount of inheritance tax you'll owe depends on the value of the estate you inherit. Currently, the inheritance tax rate is 40%, and it's payable on the part of an estate that exceeds the nil-rate band threshold. For the 2021/2022 tax year, the nil-rate band threshold is £325,000.

This means if the value of the estate you inherit is below £325,000, there's no need to pay inheritance tax. However, if the estate is left to children or grandchildren, the threshold increases to £500,000.

For example, if you inherit a property worth £550,000 that's left to children or grandchildren, there won't be any inheritance tax charged on the first £500,000. But, the remaining £50,000 will be charged at a rate of 40%, resulting in a total of £20,000 in tax.

If 10% of the estate is left to charity, the inheritance tax rate can be reduced to 36%.

In cases where the estate value exceeds £325,000, but the entire estate is left to a spouse, civil partner, or charity, no inheritance tax will be applied.

It's important to keep in mind that inheritance tax needs to be paid within six months of the estate owner's death. If you have any questions or concerns about inheritance tax, it's always a good idea to seek professional advice from a tax advisor or solicitor.

Do you have to pay Capital Gains Tax on an inherited property?

When selling an inherited property that’s not your primary residence, you may be subject to capital gains tax. The amount of tax owed is based on your income and the taxable profit from the sale.

The profits from the sale are added to your income to determine your income tax bracket for the year, and you’ll pay capital gains tax on any taxable profits at the applicable rate. Seeking advice from a solicitor or financial adviser will help you to understand legal obligations such as capital gains tax.

Dealing with the lender

Dealing with the lender when inheriting a house with a mortgage can be a complex process, but it's crucial to ensure that you're able to meet all mortgage payment obligations to avoid any penalties or legal action.

The first step is to inform the lender of the previous owner's passing and provide them with a copy of the death certificate. The lender will then send you information regarding the outstanding mortgage balance, repayment terms, and any other relevant information.

It's important to review the mortgage terms and conditions to understand the details of the mortgage and any penalties for missed or late payments. You should also be aware of any early repayment charges or exit fees, that may apply if you decide to refinance the mortgage or sell the property.

If you're having difficulty meeting the mortgage payments, you should contact the lender as soon as possible to discuss your options. The mortgage provider may be able to offer you a temporary payment plan, reduce the monthly mortgage payments, or extend the mortgage term to make the payments more manageable.

If you're considering refinancing the mortgage, you should shop around for the best deal and compare interest rates, fees, and terms from different lenders. A mortgage broker or financial advisor can help you navigate the refinancing process and find the best deal for your situation.

If you're unable to keep up with the mortgage payments or decide to sell the property, it's important to notify the lender as soon as possible to avoid any legal action. The lender may be willing to negotiate a repayment plan or accept a short sale, where the property is sold for less than the outstanding mortgage balance.

Dealing with the lender when inheriting a house with a mortgage requires careful consideration and communication.

Dealing with a mortgage

Inheriting a property with a mortgage can come with various challenges. If you find yourself unable to keep up with mortgage payments, there are several options to consider:

Options for dealing with an inherited mortgage!

  1. Sell the Property: Selling the property can be an effective solution to pay off the outstanding mortgage debt. This option allows you to pay off any debts and walk away from the property with some cash in hand. It’s essential to keep in mind that any sale proceeds will first go towards paying off the mortgage debt before any funds are distributed to the heirs.
  2. Refinance the Mortgage: Refinancing the mortgage in your name can be another option. Refinancing may allow you to secure a lower interest rate, which can result in lower monthly payments. It may also provide you with the opportunity to renegotiate the terms of the mortgage, such as the length of the mortgage term or the payment frequency.
  3. Rent the Property: Renting out the property can be an option if you're not ready to sell it yet. Renting the property out can help cover the mortgage payments and provide you with additional income. However, it’s important to remember that you’ll be responsible for any maintenance and upkeep costs.
  4. Seek Assistance: If you're having trouble making mortgage payments, it may be worth seeking assistance from your mortgage lender or a financial advisor. Your lender may offer hardship programs that can help reduce or temporarily suspend mortgage payments. Seeking professional advice can be beneficial in helping you assess your financial situation and explore all available options.

Consider all available options before making a decision regarding the inherited property. Remember there are services available to help you decide what's best for you.

Can you afford to inherit a house with a mortgage?

Assessing your affordability is crucial when inheriting a property with an outstanding mortgage. This will help you determine whether or not you can afford the current mortgage payments, and what your options are if you can’t.

One way to assess affordability is by calculating your income and expenses. This includes your monthly income, such as wages, benefits, and rental income, as well as your monthly expenses including bills, groceries, and other debts.

After calculating your income and expenses, you can decide how much you can afford to pay towards the mortgage each month. This will give you an idea of whether the mortgage payments are affordable for you or not.

What if your mortgage payments aren’t affordable?

If you find that the mortgage payments aren’t affordable, you might want to consider selling the property or refinancing the mortgage. Refinancing can help you lower your monthly payments by negotiating a new mortgage with better terms and interest rates. However, refinancing may come with additional costs, such as fees and charges.

Alternatively, you can also seek professional advice from a financial advisor, mortgage broker or an estate agent. They can help you assess your financial situation and suggest suitable options for dealing with the inherited property's mortgage.

If you do end up considering selling your inherited property and are worried about finding the right estate agent to help sell the house, we offer a free Online GetAgent Comparison tool!

We compare agents based on:

  • Most experience in selling properties like yours in the area
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We understand that every homeowner has a unique situation, and so we have a range of estate agents to help you with your individual needs!

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Assessing affordability is vital when inheriting a property with an outstanding mortgage. It allows you to determine whether you can afford the monthly mortgage repayments and what your options are if you can’t. Seeking professional advice and calculating your income and expenses can help you make the best choice for yours and the inherited property's future.

What if they had a life insurance policy?

If the deceased had a life insurance policy that covers the outstanding mortgage, the proceeds from the policy can be used to pay off the mortgage debt. In this case, you won't have to worry about taking over the mortgage payments or dealing with the lender.

However, it's important to note that not all life insurance policies cover mortgage debt. It's important to check the policy terms and conditions to see if the mortgage is covered. If the policy doesn't cover the mortgage, the proceeds can still be used to help pay off other debts, or for other expenses related to the inherited property.

What are probate laws?

If you’re thinking about selling the inherited property it's important to consider probate laws. Probate is the legal process of distributing someone's estate after they die. In the case of inheriting a house with a mortgage, the executor of the deceased person's estate will need to go through probate to transfer the ownership of the property to the heirs.

It's essential to note that if the deceased had outstanding debts, such as a mortgage, those debts will need to be paid off before the estate can be distributed to the heirs. In some cases, the sale of the property may be required to pay off the mortgage and any other debts.

Inheriting a house with a mortgage can be a complex and emotional process, but understanding both probate and inheritance laws can help make the process smoother.

Summary: Don’t do it alone!

There are multiple avenues you can take to successfully navigate the process of inheriting a property with a mortgage. Assessing your affordability, and seeking professional advice from financial advisors and conveyancers, are two routes that ensure you’re able to do what's best for you and your family.

Legal considerations such as probate laws, inheritance laws and tax laws should be taken into account, so that you’re aware of how to go about your journey of inheritance.

Ultimately, inheriting a house with a mortgage may come with financial responsibilities, but with proper guidance and support, you can make informed decisions about the property's future.

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