Losing a loved one is difficult. And, in some cases, that grief is compounded by a difficult question: what happens to the house and mortgage left behind? Debts are also inherited. If a house hasn't been fully paid off, the heirs will receive the property and the corresponding mortgage. What happens if they don't want it or can't afford it? As an heir, you have several options regarding inheritance.
In the following lines, we'll see what they are and how to act in each case, even when inheriting a shared mortgage.
Start by checking if the mortgage has life insurance.
It's becoming increasingly common to find life insurance linked to mortgages . It's not mandatory, but many mortgage loans include it to guarantee payment of the debt in the event of the death of the holder. If the deceased had a policy on the loan, the insurer will be responsible for paying the outstanding mortgage balance , and the property will pass to the heir free and clear.
What procedures are required? First, you can check if this insurance exists by consulting the Single Life Insurance Registry.
Next, you must present the death certificate to the bank and insurance company. If everything is in order, the debt will be canceled, and you'll be able to inherit the property without any further worries.
It is important to keep in mind that this insurance can cancel the debt in whole or in part , depending on the terms of the contract.
Options when inheriting a house
When a mortgage is inherited, both the assets and the debts are inherited. In this case, it's important to consider the different options, as they will directly impact the heir's financial future. Here are the main options:
- Accepting the inheritance with all debts : By accepting the inheritance this way, you assume both the assets and the debts, including the mortgage. At this point, it's important to transfer the mortgage loan to the bank, which will change the ownership of the debt.
- Accepting "with benefit of inventory": This option allows debts to be paid only from inherited assets, limiting the heir's liability to the assets received. This way, the heir's personal assets are protected. Otherwise, if the debts exceed the inherited assets, the heir would have to pay them from his own assets. In other words, it is possible to lose money when inheriting.
- Rejecting the inheritance: Renouncing the inheritance means rejecting all assets and debts. In this case, the heirs can sell the property to pay off the mortgage and divide the remainder among the heirs.
In either case, the process follows these steps:
- Obtain death certificates and last wills.
- Check whether a will exists and make an inventory of assets and debts.
- Sign the deed of acceptance of inheritance before a notary.
- Carry out mortgage subrogation if the debt is accepted.
Accept the inheritance with the benefit of inventory
This is a recommended option, as it protects the heir's personal assets. In this arrangement, inherited debts, such as mortgages, are settled solely with the assets received. In other words, the heir will not be liable with his own money if the debt exceeds the value of the inherited assets.
This procedure must be carried out before a notary, and the heir must present a detailed inventory of the estate's assets and debts. Although this process involves more paperwork, its main advantage is the protection of personal assets.
Renounce the inheritance
If the debt exceeds the inherited assets, it is possible to waive it. There are several types of waiver:
- Total waiver: In this case, the heir rejects both the assets and the debts. The waiver is irrevocable and must be formalized before a notary or in court.
- Partial waiver: Although there is no legal option in Spain to "partial waiver" of an inheritance, in some cases, heirs may informally agree to accept certain assets and reject others. For example, a property with a large mortgage could be rejected but other assets accepted.
- Waiver in favor of another heir: The heir waives his or her share in favor of another family member. However, this does not eliminate the debt associated with the mortgage.
- Renunciation with benefit of inventory: In this case, the inheritance is renounced, but liability for debts is limited only to the inherited assets.
Inheriting a shared mortgage when there are two holders
Knowing how a mortgage works when there are two holders and one of them dies is key. In these cases, the debt is divided among the heirs. Each will assume half of the debt.
Of course, even if the debt is shared, creditors can claim the entire debt from either party, since liability is joint and several. In other words, it is shared between both parties, and if one party fails to pay, the other will have to.
The heirs can then agree on how to divide the amount among themselves.
If any heir rejects the inheritance, the surviving heir will be solely responsible for assuming the entire loan.
What happens when there is a guarantee?
If the mortgage is secured by a guarantor, their liability does not disappear upon the death of the holder. That is, if the heirs accept the mortgage, the guarantor will remain responsible for the debt.
If the heirs waive the right, the guarantor's status will depend on what is stipulated in the loan contract.
How much tax do you pay when inheriting a home with a mortgage?
When faced with this situation, you must take into account several taxes:
- Inheritance and Gift Tax (ISD) : This tax depends on the net value of the inheritance (value of the property less debt) and varies depending on the autonomous community and the degree of kinship with the deceased. The deadline for payment is six months, extendable to one year.
- Municipal Capital Gains Tax : This tax is levied on the increase in the land's value from the time the deceased acquired the property until its transfer. It must be paid within six months.
- Property Tax (IBI) : This tax is paid annually and corresponds to the new owner of the property.
Advantages of inheriting a mortgage
- Favorable conditions: If the mortgage is subrogated, the original loan conditions, such as interest, terms, and installments, are maintained.
- Possibility of renegotiation: If the heir's financial profile is adequate, it is possible to renegotiate the loan terms with the bank.
- Asset protection: Accepting the inheritance with the benefit of inventory limits liability for debts to the inherited assets.
Disadvantages of inheriting a mortgage
- Financial burden: The heir not only assumes the outstanding debt, but also the taxes and other associated expenses, such as notary fees or municipal capital gains tax.
- Joint liability: If there are several heirs, all are liable for the entire debt, even if there are internal agreements between them.
- Renegotiation risk: If only some heirs assume the mortgage, the bank may require additional guarantees or modify the conditions.
Is it worth inheriting a mortgage?
Inheriting a home with a mortgage means carefully evaluating the available options. Accepting the inheritance can be a good option if the value of the home justifies the outstanding debt, but it's also essential to consider the associated taxes and additional expenses.
Renouncing your inheritance can be a viable option if your debts are excessive, but it's also important to understand the legal consequences. In any case, legal and financial advice is key to making the best decision. At UCI, we help you make informed financial decisions, even in the most complex times. If you're considering surrogacy or need a new mortgage, we're here to offer you solutions tailored to your situation.
Contact us and find out how we can help you take the next step with confidence.
