What happens if you inherit a mortgaged property and the bank forecloses on the mortgage? Here is the opinion of the Provincial Court of Barcelona

Inheriting a property from your parents is quite common, but if you are an heir, one of the most important things you need to know is that you inherit both the assets and the debts. Therefore, if the inherited property has a mortgage, you will also inherit the mortgage. Let's look at what options are available in these cases and what happens if the bank wants to foreclose on the mortgage for non-payment and auction the property.

What happens to the mortgage in the event of the death of the holder?

Let's start with the following case: a father dies and leaves a flat to his children in his will. They make enquiries and request a simple note from the Land Registry. The simple note shows a charge, which is a mortgage with Banco Santander that was taken out when the house was purchased. In situations like this, the first thing you need to know is how much the mortgage debt is.

To do this, you need to ask the bank for a debt certificate. This document will tell you how much is left to pay on the mortgage, and if there is nothing left, they will give you a zero debt certificate.

Based on this information about the mortgage, there are several options, which we will analyse below.

The heirs accept the property and take over the mortgage in place of the deceased person.

The mortgage holder is changed and the heirs take over the mortgage payments. The bank will analyse the heirs' creditworthiness and it may also be possible to negotiate with the bank:

• Request new mortgage terms, such as an extension of the term or a reduction in interest rates.
• Deferring payment for a period of time by means of a temporary grace period.

In these cases, there may also be mortgage insurance, with the bank as the beneficiary. The heirs will have to check whether this type of insurance exists. It is important to know that, in the event of the death of the mortgage holder, the insurer will pay the outstanding capital directly to the bank, thereby repaying the loan.

It may be the case that there is no mortgage debt, but it is still registered in the Land Registry. In this case, you will need to obtain the certificate of no debt from the bank, as mentioned above, and with this certificate you can cancel the mortgage with a deed of cancellation before a Notary Public.

The heirs do not have the money to pay the mortgage

In this case, there are several options:

• Instead of accepting the inheritance outright, it is possible to accept it subject to inventory, meaning that the heir does not assume the debt, but rather it is paid with the value of the rest of the assets in the inheritance. This protects the heir's assets.
• Another option is to renounce the inheritance. However, we must not forget that as heirs we must renounce the entire inheritance as a whole; we cannot keep one part and not another.
• Sell the house and pay off the mortgage. This is another alternative in the event that the heirs cannot take on the mortgage. It can be sold to a third party or purchased by one of the heirs. In this case, the inheritance would have to be accepted and registered in the Land Registry, and then the sale would have to be completed. It is quite common for one heir to want to keep the house and another to want to sell it, and in order to make the sale, they must agree.
• Renting out the property. This is another option for receiving the house and having money to pay the mortgage instalments with the rent received.

What happens if a mortgage is being foreclosed and the owner dies?

This is what the Provincial Court of Barcelona has analysed in a recent case. The scenario is as follows: a person takes out a mortgage on their home, stops paying and the bank forecloses on the mortgage. The debt is around €35,000. The person who took out the mortgage and owned the house dies in 2011 and their children inherit the house.

The Provincial Court of Barcelona considers that the foreclosure (i.e. the bank's procedure to recover the debt) also affects the heirs, but only with regard to the inherited house with a mortgage, and not with regard to their own assets.

Therefore, the heirs do not have to pay the mortgage debt with their assets, but the burden remains on the house and the bank could request the auction of that house to recover the money.

What taxes must be paid if you inherit a mortgaged house?

If you inherit a mortgaged property, you will mainly have to pay two taxes.

• Inheritance tax. The amount of this tax varies from one autonomous community to another and is calculated on the net value of the property, i.e. deducting the amount of the mortgage that remains to be paid. In addition, the amount payable will depend on the degree of kinship with the deceased or the type of property being inherited.
• Municipal capital gains tax or Tax on the Increase in the Value of Urban Land. This is a municipal tax for which many local councils have established rebates of up to 95%.

On the other hand, if the property is sold and a profit is made, the heirs will have to pay income tax (IRPF) on that profit.

In short, inheriting a mortgaged house is not straightforward and many aspects must be assessed depending on the specific situation. It is therefore highly advisable to seek the help of a solicitor who is an expert in inheritance and succession, who can study the case and assess the possible alternatives so that the heirs can choose the one that best suits their interests.