Anyone who inherits is happy about perhaps unexpected asset growth. Discounts include not only assets, but also debts. As an heir, you are the legal successor of the testator and assume his rights and obligations. In other words, you take on not only the assets the testator leaves you, but also his financial obligations. Especially if a property belongs to the estate, you should be able to assess how you deal with estate liabilities. In the best case scenario, use the property to reschedule existing estate liabilities or even the property itself.
What to do if you inherit debt?
If you have to be the heir to the testator’s debts, you can first try to sell assets from the estate and use the proceeds to pay off the debts. The sale may amount to a zero-sum game. They are rid of the assets, but they also have no liabilities.
If you have inherited a property, you have additional options. Of course, you can sell the house and use the proceeds from the sale to pay any land charges on the property. However, you may also want to keep the house and have concrete emotional reasons not to sell, especially if it is your parents’ house. A property has the advantage that it serves as collateral for loans and thus secured loans enable particularly favorable mortgage rates. If you consider that mortgage interest rates were around 10% in the 90s and have now dropped to a level of 1 to 2%, debt restructuring of debt with the help of a property is an obvious necessity. You should assess debt restructuring of debt under the keyword of mortgage lending.
What is it like when the property is financed?
If the testator has mortgaged the property with a mortgage to secure a loan, you must first process the existing loan agreement. The mere fact that the testator died as a borrower is not a reason that you, the heir, could terminate the loan. A right of termination only exists if the agreed debit interest rate expires or ten years have passed since the loan was paid out. If the testator has agreed on a variable interest rate, you can cancel without giving three months’ notice.
Compare a prepayment penalty with the interest savings
Regardless of this, you can negotiate with the bank about early termination of the loan, but you will then have to accept a prepayment penalty. The prepayment penalty is the compensation that the bank can charge if a loan is canceled early. The compensation is based on the fact that the bank can only lend the borrowed money under conditions that are worse than what was agreed in the terminated loan agreement. In view of the extremely low mortgage interest rates at the moment, it may be advantageous to accept any prepayment penalty and to conclude a new loan agreement with lower interest rates on mortgage terms. The interest you will save with the new loan agreement will make up for any prepayment penalty that may be required.
How do I reschedule debt?
Now we get to the point. If you are lucky, the property is not yet fully charged or may not be charged at all because the testator has paid it off in full. In this case, you can charge the property with a land charge and use the loan to be secured to pay debts. Your advantage is that you drive mortgage rates far more cheaply than if you accept a consumer loan with significantly higher interest rates or overdraw your checking account. With mortgage financing (construction financing) you know exactly how high your monthly burden is and you can reliably plan your household budget.
Particularly advantageous: apartment building
If you have inherited an apartment building, you now also receive the rental income as the heir. If you now reschedule your estate liabilities via a mortgage loan, you will benefit from low mortgage rates, the monthly charge of which is likely to be considerably lower than the rental income. So your rental income exceeds the principal. If you have rescheduled your debts or paid as fully as possible, you are on the absolutely safe side.