Updated: February 18, 2022

How to Borrow Against Inherited Property

Thinking about borrowing against an inherited property? The options are endless! Find out how to remortgage, buy someone out or release equity in our in-depth guide.

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Pete Mugleston

Author: Pete Mugleston - Mortgage Expert

Updated: February 18, 2022

Say you’ve inherited a property in probate – the process of legally settling a will – and you’d like to keep it but the mortgage is more than you can manage. Maybe you want to free up some funds from the home you’ve been gifted or perhaps you’ve received a chunk of cash and can afford to pay off some of the remaining mortgage. 

This guide will give you the rundown of your different options when it comes to remortgaging an inherited property, where to start and who is best placed to help.

What happens when you inherit a home with a mortgage on it?

When you inherit a property this also means you inherit any mortgage debt attached to it. So, as the new owner (and whether you choose to live there or not), after consulting with the original mortgage lender any outstanding mortgage repayments now become your responsibility.

If the deceased took measures to cover the outstanding mortgage through a life insurance policy, then this money can be used to settle the debt. If this isn’t the case there’s two main choices you can make:

  • Sell the property and use the proceeds to repay the mortgage and any other debt attached
  • Arrange to refinance the current mortgage terms onto a better deal and in your own name

Remember, neither of these options can be actioned until full probate – including any inheritance tax payable – has been settled and the property is legally yours.

Is mortgage debt included for inheritance tax purposes?

Inheritance tax (IHT) is only due on the net value of someone’s estate, over and above the current nil rate threshold of £325,000. So, any mortgage debt – as it was used to assist the purchase of an asset within the estate – will reduce the overall net value by the amount outstanding.

For example, if the estate was worth £500,000 overall and the mortgage outstanding on the property asset is £200,000 there would be no IHT liability. But, if the estate was worth £825,000 then this would mean a net value of £625,000 and, therefore there would be a 40% liability on the amount over the nil rate threshold (£300,000 x 40% = £120,000).

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How to refinance an inherited property

If you need to remortgage the property, here’s what to do:

  1. Contact the current lender. Do this as soon as the probate process begins. Most will suspend repayments until probate is all wrapped up. It could even be that the deceased’s life insurance will take care of the remaining amount.
  2. Connect with a broker. You want one that’s a) an expert in remortgages but b) specialises in those relating to an inherited property. They can then familiarise themselves with your situation and advise on whether a new lender or sticking to the original is likely to get you the best rate. They’ll also know which are open to agreeing to a remortgage less than six months into ownership.
  3. Renegotiate the terms. If you choose to stay with the same lender, a broker can help get you a new deal. Like with any mortgage application, a lender will be looking at your earnings and spending pattern, credit history and debt to determine whether you’re likely to be a reliable borrower. They’ll also put your finances through a stress test to check what you can afford.
    OR…
    Apply for the mortgage with a new lender. A mortgage broker will be able to provide you with a list of lenders best suited to your situation. They’ll then talk you through the standard mortgage application process.
  4. Notify land registry of the new ownership. This isn’t obligatory but it’s recommended that, once the probate period is over and the mortgage is agreed, you have the property transferred into your name via the land registry. A solicitor will should be able to assist you with this process

Our broker-matching service can connect you with an expert in refinancing for an inherited property. They’ll be able to advise you on what this process might look like for you and make it a little less stressful. Make an enquiry for a free consultation.

Eligibility requirements

Just like with a traditional mortgage application, lenders will be looking to make sure you’re well-placed to pay back the new amount. But there are also some extra conditions when it comes to remortgaging for an inherited property.

  • Property Ownership. Most lenders won’t accept a remortgage application until you’ve owned the property for at least six months.
  • Income and outgoings. A lender will want to conduct a thorough affordability check on your overall earnings and outgoings to ensure you have sufficient disposable income to cover the repayments. This will include wanting to see evidence of your current earnings. For a full picture on the documentation you may be asked to produce, take a look at our mortgage application guide here.
  • Debt to Income Ratio (DTI). Any outstanding debts you have – personal loans, credit cards – will also form part of the equation by lenders using their own internal DTI criteria. Typically, most lenders will accept an overall monthly debt commitment of around 30% of your total income.
  • Credit history. A clean credit record will improve your chances of getting the best terms available. It’s a good idea to download your credit reports before you apply to check if there’s any information on there that’s either incorrect or outdated so it can be removed.
  • Your age. Some lenders won’t offer you the remortgage if you’re over 70 years of age, however there are a few who do not impose any upper age limits at all.

If one of these things or more doesn’t seem weighted in your favour, then don’t worry just yet. A specialist broker will be able to advise on lenders that might be more open to your circumstances.

How working with a remortgage broker can help

Getting a free consultation with one of the brokers we work with will give you all the information you need for remortgaging an inherited property. They can:

  • Determine whether the current lender or a new one will give you the best deal.
  • Help find a lender open to your financial circumstances.
  • Talk you through what’s needed for a remortgage in this situation.

How to buy out a sibling or another beneficiary

It’s quite common for one property to be left to multiple people, say siblings or cousins. In this case, you and your co-owners could continue jointly owning the property – in which case you’d need to refinance to get a joint mortgage – or have one of you buy out the other/s. To do so, you’ll need to:

  1. Consult a broker. They can look at your finances and help you determine if you have the funds to buy them out with cash or walk you through the process of getting a mortgage to buy them out.
    Sidenote: you’ll likely need to provide a deposit of at least 5% of the property value. During probate, that value will be based on the open market value.
  2. Have a solicitor put your intentions in writing. A letter to the other co-owner/s should be sent, laying out your desire to buy them out and stating how you plan to do so – either via cash or a mortgage in principle.
  3. Submit a document to the land registry. If the co-owner/s agree to the sale, you’ll need to engage a solicitor to put a document together showing the grant of the probate, aka proof it now belongs to you, alongside signatures of all the beneficiaries.
  4. Allow the solicitor to do all the paperwork. They’ll do some searches on the house to make sure everything is in good shape and complete the purchase on your behalf. This process will incur the usual mortgage and legal fees as well as stamp duty if the property exceeds a certain value, normally £125,000. There may be further stamp duty to also pay if you already own a property.

All of the above assumes everyone is happy with the situation. If co-owner/s aren’t on board, talk to a specialist broker about the different options available.

Equity release on an inherited property

Perhaps you want some extra money to buy another home or to do up your inherited one. Equity release would allow you to do that if you’re over 55 years old. An equity release arrangement is when you withdraw some funds from the value of the property while still holding onto it. Depending on whether you opt for lifetime mortgage or home reversion equity release, you can choose to make repayments over time or settle up when you sell up.

Requirements

In order to do this, most lenders will want:

  • A large portion of the mortgage, if not all, to have already been paid.
  • You have owned the property for at least six months. (Note: some lenders will waive this under particular circumstances).
  • You are the sole beneficiary of the property.
  • To see the grant of probate.
  • To know if there are other outstanding debts on the property.

If you can meet all of these stipulations, your chances of getting the approval you need will be strong. For any uncertainties, get in touch to chat them through with a broker specialising in equity release for inherited properties.

What happens if the property you’ve inherited already has equity release on it?

If the previous owner of the property had already been through this process on this particular property then it’s the responsibility of the executor to inform the lender and ascertain the amount to be paid. The death signifies the end of the equity release agreement and so they need to receive full repayment on the loan.

To do this, the property is usually sold and any funds left over would be yours. Alternatively, other assets from the deceased’s estate could be sold off or, if you’d like to keep the property, there’s the option for you to contribute to the estate or else buy the property directly using cash or a mortgage.

Lenders tend to give anywhere between one to three years for everything to be settled so you have a bit of time to think and even consult an expert.

Can you take out a buy-to-let mortgage on an inherited property?

If you’d like to rent out the property, buy-to-let mortgages are available but this process comes with an extra level of lender scrutiny. Why so? Well, back in 2017, lenders were told by the Bank of England’s Prudential Regulation Authority to be tougher in assessing buy-to-let landlords’ potential to repay mortgages if interest rates were to go up. That means they’ll be taking a harder look at your income and really considering how much rent you’re likely to receive.

If you’ve inherited a property that’s currently rented out, the executors of the estate will receive the rent until the property has been through probate. If you later decide to sell, you will also need to factor in the legal rights of tenants.

What lenders will be looking at:

  • Rental cover: Lenders want to make sure the rent charged is enough to cover mortgage repayments. Some lenders put a specific percentage on that going as high as 145% rental cover while others only ask for 125%.
  • Stress tests: They typically test against a rate of 5 to 5.5%, rather than the average 3%, when it comes to buy-to-let mortgages on an inherited property.

Get matched with a remortgage broker

Having an experienced broker working alongside you could certainly simplify many of these inheritance processes . The brokers we work with have the knowledge and can help you approach the right lender to get the best possible deal for your circumstances. Call 0808 189 0463 or make an enquiry for a free, no-obligation chat with the right broker for you today.

FAQs

What tax do I have to pay on an inherited property?

You’ve likely heard of inheritance tax. This is something that needs to be paid if the combined value of everything the deceased owned – savings, property, stocks and shares etc – exceeds £325,000. This is usually paid from the deceased’s estate. Capital gains tax is something you’d probably have to pay if you opted to sell the property. And income tax is what you’d pay on any rental income you’d receive from an inherited property that’s a buy-to-let or holiday let.

The property I’ve inherited is abroad. What should I do?

You may have to take a trip out there yourself to assess the property and whether you want to keep or sell it. If you want to keep it and the mortgage isn’t paid off, you’ll need to speak to a specialist overseas mortgage broker to find out what your options are.

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We can help! We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in Remortgages Ask us a question and we'll get the best expert to help.

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Pete Mugleston

Pete Mugleston

Mortgage Expert

About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information 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 that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. 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. Equity released from your home will also be secured against it.

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