If you have recently inherited a house, or will do soon, you may be wondering if you can release some equity from this new asset?
It is a common question. Although being gifted a property means you are now financially much better off, for many people, the need for cash is still important.
So if you are looking at ways to tap in to this new wealth, perhaps for a new car or home improvements, read on.
We’ll explain how a house can be inherited and what options there are if you need to release equity from it.
Yes!
It is possible to release equity on a property that you have recently inherited.
How you achieve this will depend on the following:
- Your own financial status
- The type of property
- The available equity
How do you inherit a house?
There are two ways that someone in the UK can inherit a property:
Deceased’s Will
A person’s will is a legal document that outlines their wishes and instructions for the distribution of their assets, property and possessions after they pass away.
If you are named as a beneficiary in a will then you may be entitled to inherit a certain percentage of the deceased’s assets, or specific items mentioned in the will.
So it could be possible for a property owner to make explicit instructions for a named beneficiary to inherit a specific property.
Rules of intestacy
When an individual passes away without a valid will, the distribution of their assets (the estate) is carried out based on specific regulations known as the rules of intestacy. An individual who passes away without a will is termed as an “intestate person.”
Under the rules of intestacy, only married or civil partners, along with certain other immediate family members, have the right to inherit.
In cases where an individual creates a will that is not legally recognised, the rules of intestacy take precedence in determining how the estate will be distributed, superseding the non-valid will.
Transferring ownership of an inherited property
Transferring ownership of an inherited property involves legally passing the rights and responsibilities of the property from the deceased person to their beneficiaries. This process includes validating the will, verifying property details, preparing a transfer deed, recording it in Land Registry property records, and addressing any tax considerations.
Once completed, beneficiaries assume ownership and management of the property.
Does the property already have a mortgage on it?
You may be surprised to learn that if an inherited property has a mortgage attached to it, then you inherit the mortgage as well!
The property won’t technically be yours until probate is complete, so there’s not much you can do prior to this.
However, it is a good idea to get in touch with the lender and explain the situation. They will have set procedures for these types of events and it will give you some time to plan.
Once the property is legally yours, you will be responsible for maintaining the monthly mortgage payments and insurance etc.
So how do you release equity on an inherited house?
Unless you sell the property, the only way to release equity from a recently inherited house is by taking out a mortgage or secured loan.
The basic affordability and financial checks still apply for any new mortgage applications, even though you received the property as a gift.
Let’s take a look at the options:
Financial status and affordability
All mortgage lenders will undertake credit checks and affordability assessments when you apply for a mortgage.
So you need to have sufficient income to qualify.
If it is your intention to keep the property as an investment, then you need to match the mortgage type to your intended use. Normally this would be a buy to let mortgage, holiday let mortgage or second home mortgage.
Each has their own criteria for minimum income and rental calculations, which will determine the size of loan available.
If you don’t own any other investment properties, you may be classed as an accidental landlord, which means you’ll need a consumer buy to let mortgage.
Property type
The type of house, and what it is made from, is extremely important. If the property is made from brick/block walls and a tiled roof then this would be classed as standard construction, which is acceptable to all lenders.
Where the constructions materials, or methods, differ from this then a specialist property mortgage may be needed. A small number of lenders offer these for non-standard construction methods, that could include:
Mortgage lenders will need the property to be watertight and habitable when the mortgage starts.
If this is not possible, perhaps because extensive works are needed, then they will not approve the application. In these cases you can apply for a short term bridging loan, to fund the repairs, and then remortgage to a mortgage lender once these are complete.
If the property is leasehold then find out how many years are remaining. As the lease term runs down, the mortgage availability decreases as well.
It’s not as difficult as it may sound, but you should consult with a mortgage broker so that the finances are set up in the best way for you.
Available equity
The equity in a property is the amount that is owned outright, without any secured debts. So if you had a property worth £300,000 that had a £100,00 mortgage on it, the equity would be £200,000.
When releasing money from a property, you can only access this equity portion.
This is more relevant if you inherit a property that already has a mortgage attached, as this debt reduces the equity value.
Here’s two simple examples:
| WITH MORTGAGE | WITHOUT MORTGAGE | |
|---|---|---|
| Property value | £300,000 | £300,000 |
| Mortgage o/s | £100,000 | £0 |
| Equity | £200,000 | £300,000 |
| 75% Loan to value | £225,000 | £225,000 |
| Release equity | £125,000 | £225,000 |
What is an unencumbered mortgage?
In relation to mortgages, the term ‘unencumbered‘ means that a property has no mortgage or secured debt attached to it.
It is 100% mortgage free.
An unencumbered mortgage is the term used for any capital raising remortgage on a mortgage free property.
As you already own the property, there’s only a small amount of conveyancing work required, to register the new mortgage at Land Registry. So no property chain delays to worry about.
A remortgage should take around 4-8 weeks from the point of applying for a new mortgage.
How much can you borrow?
This will depend on whether the property is going to be your main residence, or let out.
Maximum LTV should be around 75-90% but this will depend on your personal financial situation and affordability.
Do you need a solicitor?
There is no requirement for you to instruct your own solicitor, unless you really want to.
The mortgage application will be classed as a remortgage, as you are not purchasing the property (you already own it). This means there’s very little legal work needed and the lender’s solicitor can do this for you.
Is a remortgage based on your income?
UK mortgages are regulated by the Financial Conduct Authority, and lenders are expected to calculate how much you can borrow based on your affordability. This is to ensure that you only borrow what is affordable and reasonable for your financial situation, protecting you as a homeowner.
What can you release equity for?
When you apply to release equity, or capital raise, the lender will ask you what you need the extra money for. Most reasons are acceptable, and these include:
- Home improvements
- Buying a new car
- Property investment
- Family holiday
- Debt consolidation
- University fees
- Wedding costs
- Family gifts
CONTACT A REMORTGAGE EXPERT
If you wish to investigate your re-mortgage options we can put you in touch with a fully qualified whole of market mortgage broker.
What if you can’t get a remortgage?
Even though you may have just inherited a valuable house or flat, this does not automatically get you approved for a remortgage.
All lenders will need you to pass their credit checks and financial assessments. If your capital raising remortgage application is declined then you may need to look elsewhere to borrow against your equity.
It is important that you properly assess why you were declined, and why you need to borrow the extra money. As you are increasing the mortgage debt, your monthly repayments will be higher.
If you still need to raise some extra money then you could consider a second charge mortgage.
This is a secured loan, which is a bit like a mortgage, but is set up without changing the main mortgage you already have. It is used to access equity when a remortgage is not possible.
It is more expensive that a simple remortgage but the lenders are more flexible on their assessments of your income and credit profile.
It’s best to discuss your needs with a broker so they can work out the best way you can borrow this extra money.
When can you apply for a mortgage?
You can only begin the remortgaging process once probate is finalised and the property has been transferred into your name.
How can a mortgage broker help?
There are quite a few steps to take before you can begin to apply for a new mortgage, and a mortgage broker will be able to take you through each of these one by one.
Any new mortgage needs to be matched to how the property will be used, and what it is constructed from.
Then your own finances need to be assessed to determine whether you can qualify for the new mortgage amount. If you have a few blips on your credit file then a broker can find lenders that are more understanding, and willing to lend.
An independent mortgage broker will have access to well over 100 possible lenders. Once they have worked out what is suitable for you, they will spend time searching for the right deal.
After fully explaining everything to you, they’ll then help with the paperwork and any further requirements.
Ready to explore your options?
If you’re on the cusp of starting your mortgage journey and could use the guiding hand of a professional, don’t hesitate to reach out to a reputable mortgage broker.
They will make the process smoother and more profitable than going it alone. And remember, knowledge is power.
The more you know, the better decisions you can make. Keep reading, keep asking questions, and keep moving forward on your journey.
