Published 15th April 2019 · Updated 25th August 2023 by Martin Alexander
Getting a mortgage on an inherited property can seem confusing. The probate procedure can be lengthy and usually takes up to half a year, even longer in some circumstances. Once probate has been finalised, you may be left with property and could be wondering what your options are as a beneficiary.
Common reasons for getting a mortgage on a probate property involve:
- Replacing the current mortgage with a new mortgage in your name
- Releasing equity from the property
- Purchasing a probate property using a mortgage
- Replacing the existing residential mortgage with a buy-to-let mortgage
As well as inheriting a property, you may have inherited funds as part of the estate. It’s common for beneficiaries to utilise the funds towards purchasing either a home or an investment property.
Should I get a mortgage on an inherited property?
If you’ve recently inherited a property through probate, you may want to explore your options. For instance, if the property is mortgage-free, you could take out a mortgage to release equity. If you want to do this, speak to an advisor who can assess your affordability and the types of mortgage rates you’ll be eligible for.
You’ll also want to book a valuation with a local estate agent to have an approximate value to work from. That said, a valuation may have already been carried out as part of the probate when valuing the estate. It’s important to understand that a remortgage will incur a monthly cost as part of the mortgage arrangement.
If you already have a mortgage, multiple outgoings can soon add up. Be sure that you’re ready for the additional expense and have a plan for funding the new mortgage. An advisor can also assess your income to ensure that getting a new mortgage is a viable option.
If the inherited property already has an existing mortgage, as a beneficiary, you’ll need to place the mortgage in your name. Depending on the existing lender, the rates may remain the same, or you could try to negotiate an entirely different deal. Sticking with the same lender may not give you the most competitive rate, so it pays to shop around.
You can view the latest mortgage rates here.
Can I rent out a property I’ve inherited through probate?
If you have no plans on living in the property yourself, you could decide to rent it out. Again, if the property is mortgage-free, you could release some equity. This can be very beneficial, especially if you need funds to refurbish the property. Nonetheless, you’d still want to proceed with caution.
If the property is run down, some lenders may refuse to lend. You’ll likely need a specialist form of finance, such as bridging finance, to refurbish the property. You can remortgage once the property is refurbished to repay the bridging loan. This is an example, so please consult an advisor before you decide to do anything.
To rent the property, you’ll need a buy-to-let mortgage. Even if the property already has a buy-to-let mortgage, you’ll still need to place the mortgage in your name.
Buy-to-let mortgages are assessed in a completely different way from residential mortgages. Some lenders don’t base the assessment on the income of individuals and will focus the application on the property’s potential rental income. Most lenders require rental income to cover 125% – 145% of the mortgage, so check the rent your property can achieve.
Things to consider as a new landlord
If you intend to rent the property, it’s important to understand your legal duties as a landlord. There’s been a lot of recent legislation that landlords must adhere to. For instance, check the property has an EPC (energy performance certificate), gas safety certificate, and smoke alarms on each floor.
This is just a small example of your legal duties as a landlord. You’ll also have to make sure your tenant’s deposit is placed in a protected scheme. This can be overwhelming for new landlords, so you may want to consult a letting agent to manage this.
Many landlords choose interest-only mortgages instead of repayment mortgages. This is so that monthly mortgage payments remain low. This gives landlords a better cash flow as they profit more each month.
The downside of having an interest-only mortgage is that you won’t own the property outright at the end of the term. This is because you’ll only pay the loan’s interest, not the loan itself. When the mortgage term ends, landlords usually sell the property to settle the balance.
From a financial perspective, you should also consider whether or not you’d be able to afford the mortgage if the property was empty and had no rental income. Although lenders factor this into their assessments, thinking about this yourself is also advised.
Will a new mortgage affect inheritance tax?
Delays can sometimes arise as a result of outstanding inheritance tax. If you’ve inherited the property through probate, you should have already been informed of your duties regarding inheritance tax.
The details are checked by the executors of the will to ensure everything is done correctly. For instance, if the deceased owner had life insurance, it may continue to cover the mortgage for a set time.
Inheritance tax is 40% if the estate is valued at over £325k. This figure could rise to £650k on the second death of a couple who are married or in a civil partnership. Properties also can’t be gifted or sold at reduced rates to family members to avoid inheritance tax.
If you’re considering selling the property, you may benefit from an emergency grant of probate. This allows beneficiaries to sell the property after 14 days.
What if there are multiple beneficiaries involved?
If there are multiple beneficiaries involved with a property, it can get confusing. The process becomes a lot easier if one benefactor has agreed to buy the rest of the beneficiaries out. An advisor would then liaise with the current lender, ensuring that the mortgage and ownership would be placed in the new owner’s name.
If multiple beneficiaries wish to retain ownership, getting a mortgage can be more difficult. This is because not every lender will entertain such arrangements. Only a handful of lenders will agree to multiple borrowers, with the maximum usually being four people.
Mortgages that involve joint ownership are usually geared toward two owners. Having three or four owners makes things a lot more complicated, but it’s still possible. Having an advisor on board can save you time and frustration.
Applying directly with a lender without understanding their criteria could result in a declined application. This will only restrict your future chances of gaining mortgage approval.
About the author
Martin Alexander
Martin is a senior mortgage advisor who has held a CeMAP qualification for over 15 years while completing an MBA in Global Banking and Finance.