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What Happens If You Inherit a House with a Mortgage?

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If you inherit a property with a mortgage, the mortgage will need to be paid. But don’t panic, as the mortgage lender will give you time to decide what to do with the property.

Can I leave a mortgaged house in a will?

Yes, you can leave a mortgaged property in your will. If you are the sole owner of a property, you’ll need to name a beneficiary or beneficiaries and outline how ownership of the property should be split when you die.

If you jointly own with someone else, what will happen in the event of your death depends on how you owned the property. If you were ‘joint tenants’, your share of the property will automatically pass to the other owner. But if you were ‘tenants in common’, you can leave your share to whoever you like.

What are your options if you inherit a house with a mortgage?

If you inherit a property with a mortgage, you have three basic options:

  • Pay off the mortgage using life insurance or other cash/assets from the deceased person’s estate
  • Sell the property and use the proceeds to pay off the remaining mortgage
  • Take out a mortgage in your name for the inherited property

If you inherit a house jointly with other people, you’ll need to make all your decisions about the property together. Selling the property and splitting the proceeds might be the simplest option.

Is there life insurance in place?

Most people who own a property jointly with their partner, or who have dependents, have life insurance that will pay off the mortgage if they die.

Having this type of protection in place can make things easier for your family in the event of your death.

The executors of the will should be able to tell you in there is a life insurance policy in place.

Are there cash or assets from the estate?

When someone dies you need to get probate (or a ‘grant of representation’ if no will is in place). Once you have probate you arrange for debts to be paid off, and assets and cash distributed to beneficiaries named in the will.

A mortgage is viewed as a priority debt that needs to be settled out of the estate before cash and assets are distributed.

What are your options when you inherit a house with a mortgage?

If there isn’t life insurance or cash to pay off the mortgage, the mortgage debt will need to be repaid to the lender another way. But you won’t need to do this immediately.

When someone dies the mortgage lender should offer a grace period when repayments are suspended while the estate is sorted out. However, interest will still accumulate on the debt in this period.

Once the property is legally yours, you can register it in your name at the Land Registry and then decide whether you will sell or keep the property.

Can I sell an inherited property?

Once you own the property, you can sell it to pay off the remaining mortgage.

Depending on the state of the property, you could sell it through an estate agent or auction.

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Can I get a mortgage on an inherited property?

If you decide to keep the property, you’ll need to get a mortgage on it in your name. You should discuss your options with a mortgage broker.

You might decide to rent out the property – if so, you’ll need a buy-to-let mortgage. If you want to live in the property, you’ll need a residential mortgage.

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Do you pay tax when you inherit a house with a mortgage?

Whether you pay inheritance tax (IHT) depends on the total value of the deceased person’s estate, and their relationship to you.

In general, if the estate (including property) is worth more than £325,000, IHT is due at 40% on anything over this figure. But you can leave assets to your husband, wife or civil partner free of IHT.

There is an extra allowance if the main residence is passed on to a direct descendent – for example, passing a house to a child or grandchild. This is worth £175,000. This means up to £500,000 can be passed down free of IHT, or £1million for a married couple.

However, you won’t get the extra residence nil-rate band if you leave your property to someone who is not your direct descendant – such as a niece or nephew.

You might need to pay capital gains tax (CGT) on an inherited property if the property increases in value between you inheriting it and selling it.

If you rent out an inherited property, you will need to pay income tax on the rental income.

Stamp duty is not levied on inherited properties. However, if the property you inherit is shared with other beneficiaries and one of you buys out the others then stamp duty could be due. It’s best to speak to an independent financial adviser about this.

Always remember that your property may be repossessed if you do not keep up repayments on your mortgage.

Individual savings may vary, your savings will depend on personal circumstances

Last Updated: November 22nd, 2023

Phil Spencer

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