We look at how probate loans work and how they can help make the process of dealing with someone’s estate go smoothly.
Dealing with the estate of a loved one who has died can be a stressful and difficult process at the best of times but there can also be money issues that complicate it further.
If you’re dealing with the finances of the person who has died because you were named as an executor in their will, or you were their closest relative if they didn’t have a will, you’ll have to make a number of payments during the process.
Any debts they had will need to be paid off from their estate and you’ll need to pay legal fees and any inheritance tax that applies, which could be substantial depending on the value of the estate.
When is a probate loan necessary?
You might not have the money to make the necessary payments until their assets, which often consist mainly of a property, are sold.
You have to pay at least some of the inheritance tax due to get a grant of probate – the legal authority you need before you can deal with their assets (known as letters of administration if the deceased didn’t have a will) – so you won’t be able to sell the property before then. You may also need to pay off their debts and pay legal fees before the property or other assets are sold.
Taking out a probate loan means you can pay for these things when you need to without needing to have sold the property. They can be granted in as little as 7-10 days which means you don’t have to rush the sale and potentially accept a lower price. If you can take your time, you’ll be able to maximise the sale price and the amount the beneficiaries of the estate inherit.
Another reason for taking one out is so the beneficiaries can get their inheritance quickly rather than having to wait for the probate process to complete or for the property to be sold, as it’s usually at least six to nine months before the assets can be distributed even if the situation is straightforward.
You can also use a probate loan to release equity from an inherited property to refurbish it and boost its value before selling it.
What is a probate loan?
A probate loan is essentially a bridging loan – short-term finance designed to bridge the gap between you needing to pay for things and getting the money to do it. It is secured on property or other assets – usually those that belonged to the person who died in this case – to minimise the risk to the lender as it will be able to sell the asset used as security to get its money back if you can’t repay the loan.
The flexibility of bridging loans means they can be used for a range of purposes, including buying a new property if you haven’t yet sold your old one and buying land without planning permission, as well as helping with probate.
They are more expensive than other types of finance so should only be taken out if you have no other option but as they are designed to be paid back after a relatively short period you won’t have to pay the interest for long. And if taking one out means you’ll be able to get a higher price for a property you’re selling, it’s likely that the extra money you make will more than cover the interest costs. Learn more about bridging loans and compare rates.
How does a probate loan work?
The loan is usually taken out for a term of between one month and one year although some lenders offer terms of up to two or three years. You can generally borrow up to 70% of the property it’s secured on. Loans can range from tens of thousands to millions of pounds.
Although your credit history and personal finances will be looked at by the lender when you apply, the exit strategy is the most important aspect. This is how you plan to pay off the loan – in the case of probate it will usually be when the property that was owned by the person who died is sold. Alternatively, it could be by remortgaging the property, cashing in their investments or selling their other assets.
The lender will value the property or assets and make sure that your proposed exit strategy is likely to succeed when deciding whether to lend to you, but the easier they are to value and sell, the better.
Rather than making interest payments during the term of the loan, the interest can be “rolled up” so that you pay it all off when you repay the loan at the end of the term. The interest rate you pay will depend on your situation and how risky the lender thinks it is. You may also have to pay an arrangement fee of up to 3% of the loan amount.
It’s a good idea to speak to a specialist bridging loan broker who can look at the whole available market to find you the best deal, especially as only a limited number of lenders offer probate loans.
Pros and cons of a probate loan
The benefits of probate loans are that they are quick to arrange and can give you the money you need to pay off debts and to pay legal fees and inheritance tax when you’re dealing with the estate of someone who has died before you can get access to the money from the estate itself.
However, they charge relatively high interest and you could face substantial penalties if you can’t pay off the loan at the end of the term.
Probate loans can be useful for dealing with the financial issues that can arise when you’re dealing with someone’s estate but as they are expensive they should only be taken out if there’s no other option.
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