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Finding a Probate Mortgage

Expert advice on finding a probate mortgage, working your way through the complexities of the legal processes, and raising financing to keep an inherited property.

What is a probate mortgage?

Probate is the legal process of certifying a will, and you may have inherited a property that is going through the probate process.

Reasons for remortgage a property in probate include:

  • Remortgaging into your name as the new owner.
  • Raising capital on an unencumbered property.
  • Using the mortgage to purchase an estate being sold through probate.

There are always multiple options for managing a probate property - and if you have a cash inheritance as well as the home, you can use those funds to repay an existing mortgage, as an investment, or as a deposit towards a new, more competitive mortgage.

Probate can take around six months, so the process can require patience.

Business finance broker regularly works with clients who have inherited property, and there are other important factors to consider:

  • Inheritance taxes payable.
  • How probate will impact the property value.
  • Whether you are inheriting a mortgage liability.
  • Whether it is worth remortgaging the inherited home.
  • Whether there is more than one beneficiary.

What are the Inheritance Tax Considerations on an Inherited Property Mortgage?

Inheritance tax can delay the remortgaging process, and the executors of the will can often delay proceedings while they work through the legal system.

Examples include:

  • Collecting deeds and mortgage documents.
  • Investigating life insurance policies.
  • Identifying existing secured lending.
  • Valuing the property through a surveyor.

It is not unusual for an inherited property to be left empty while these tasks take place, and so vacant property insurance can be a wise precaution.

Inheritance tax is, currently, charged at 40% on estates inherited worth more than £325,000, or more than £650,000 in some scenarios. Given this high tax rate, it is often sensible to have a mortgage on the property from a tax-efficiency perspective.

As an illustration:

  • You have a £400,000 property with a 20% mortgage outstanding. The inheritance value is, therefore, £320,000, and no tax is payable.
  • If you took the £80,000 cash from the mortgage and gifted it, provided you live for seven years, there is no tax payable on that element either.

Parents cannot gift their children property to avoid inheritance tax, and you cannot buy it from them either, as the same threshold applies to properties even if your parents remain alive and well.

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Based On Your Yearly Income, You May Be Able To Borrow

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Most lenders will let you borrow 4.5 times your annual salary so, as long as you have a standard 10% deposit, you should be able to borrow this much.

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Depending on your personal circumstances, some lenders may let you borrow 5 times your salary.

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Lenders usually cap the amount they lend at 5.5 times your salary, so it’s unlikely you’ll be able to borrow more than this.

What is Probate Value, and how is it Different from Market Value?

Probate values a property based on open market value and doesn't consider the appeal of the area, or a premium that might be payable on that particular property.

As a buyer, you can purchase a home through probate at a very low price, which is often a preferred option for beneficiaries who want to turn their inheritance into cash.

Estate agents manage most probate properties, although sellers can negotiate this as a private transaction. There is, however, a longer completion process, which means a mortgage on a property bought from probate might need to run for a slightly more extended period, or you may need a longer mortgage offer period to give you enough time.

Beneficiaries may sell a probate property for any number of reasons - they might not wish to keep the family home, cannot afford the mortgage, or want to realise cash against their inheritance.

There is also an option called an 'emergency grant of probate' whereby sellers are allowed to list a property for sale after around two weeks.

How Can I Manage Inheriting a Mortgage?

Interest on a mortgage is still payable throughout probate. However, most lenders will not expect repayments, or charge a penalty, as long as they know what is happening.

Sometimes, executors keep the payments up to date themselves by releasing funds from the estate.

Note that if you inherit a rental property, and tenants are in place, the rental income must pass to the executors until probate is complete.

Can I Swap an Inherited Mortgage with a New Remortgage?

You can, although you are strongly advised to work with an expert broker or advisor to guide you through the process.

Options include:

  • Staying with the existing lender - renegotiating terms once probate is granted.
  • Some lenders will waive early repayment charges, however standard eligibility criteria still apply.
  • Remortgaging with a new lender to repay the old mortgage.

The affordability criteria are the same on taking over an inherited mortgage as they are on taking out a new remortgage. That means that you need to prove affordability at 'stress test rate' interest levels.

As an example:

  • You want to borrow £100,000 on a 25-year mortgage at a 3% interest rate.
  • You need to demonstrate you could still afford the repayments if the interest rate climbs to 6%.
  • Therefore, your disposable income needs to be £645 per month to be granted the mortgage, even though it will only cost you £475 per month.

Some exceptions do apply, for example, a mortgage with at least a five year fixed rate can be stress-tested at the discretion of the lender.

Affordability checks include:

  • Your employment status - self-employed people usually use a specialist broker to negotiate their remortgage rates.
  • How much you earn, and how stable that income is.
  • How long you have been in your current role.
  • Whether you earn additional or irregular income.
  • Your credit history and credit score.

Mainstream lenders often struggle to accept applicants with recent bad credit issues. Still, it is always worth consulting an experienced broker, who works with specialist lenders who can offer adverse credit mortgages.

Can I Rent out Inherited Property Through a Buy to Let Mortgage?

This process is possible but complicated, so expert advice is essential.

You need to meet affordability criteria, with a minimum rental income, before a lender offers you a buy to let remortgage on a probate property.

Calculations work like this:

  • If you are a basic rate taxpayer, your rental income from a BTL property must cover 125% of the mortgage payments.
  • If you take out a rental mortgage through a limited business, the same 125% threshold applies.
  • Interest rates are stress tested at 5-5.5%, and you will need to prove the rent will cover the mortgage payments even if interest rates were to reach these levels.

What are my Options if I Have Inherited an Unencumbered Property?

Unencumbered properties have no mortgage or borrowing secured against them.

If you inherit a home without a mortgage, you might decide to:

  • Live in it.
  • Sell the property.
  • Rent it out.
  • Remortgage it to raise capital.

Most lenders will need you to have owned the property for at least six months to offer to lend. However, you can find a mortgage much sooner by working with a specialist broker who can recommend mortgage providers who offer Day One Remortgages or similar products.

What Happens if Multiple People Inherit the Same Property?

Complications arise where a will has multiple beneficiaries, and therefore you each own a share of the same property.

You can remortgage to buy out other shares, or make a joint decision about whether to sell, keep, or rent out the home.

Joint mortgages are also an option, in which case a broker is vital, as this complicated scenario requires expert support to ensure you find the right lender who can offer a mortgage to multiple homeowners.

In any of these circumstances, give the Revolution Brokers team a call for more information about the remortgage and mortgage options on inherited properties, at any stage of the process. Ring the team on 0330 304 3040 or send us a message to [email protected].

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