27 Jun What happens to a mortgage after death?
What happens to a mortgage after death?
With soaring house prices over the last few years it is becoming more common for people to pass away when they still have a mortgage over their property.
The word “mortgage” is derived from the French word “mort” being death or death pledge. In other words a mortgage continues after death.
Leaving property to your beneficiaries
Leaving land and/or house to one of your loved ones might seem like a very kind and generous decision to make in your Will. However, if the property has a mortgage it can also cause problems.
It is a general rule of thumb that all debts are paid by an estate and that in Australia you do not “inherit” debts. This is true for everything except, in certain circumstances for mortgages.
The best case scenario for the estate of people who pass away leaving a mortgage, is that they have enough assets to pay off the mortgage without needing to sell the property or the need for any beneficiary to take over mortgage as a package with the land and/or house. When this is not the case there are a number of problems that can arise.
Quite often mortgages are held jointly eg: between spouses or partners. In these situations the surviving owner becomes solely responsible for the mortgage. This means that the surviving mortgagor is responsible for paying off the mortgage, whether they inherit any assets from the deceased or not. Such joint mortgages are not paid off by the estate assets, as with other debts that were in the sole name of the deceased. This can cause difficulties for the surviving joint mortgagor if they are unable to make the repayments on their single income. Quite often the only way out is for the home to be sold so the surviving spouse (joint mortgagor) can pay off the mortgage and purchase a property with a mortgage that they are able to service. The bank has to agree to a refinance to the survivor and if they are not convinced of loan serviceability then they will not consent to the title change.
If you make a specific gift of a property in your Will which happens to be subject to a mortgage or charge, it is very likely that you will be passing the mortgage onto the beneficiary as well. The law in Victoria states that if the Will does not dictate how the mortgage should be paid, the beneficiary will receive BOTH the property AND the mortgage. A common situation where this could be a problem would be leaving your property you own in your sole name to your spouse, but your other assets to your adult children. You could well be leaving your spouse with a large mortgage and no means for paying this off. Your spouse may have to consider suing you adult children to seek a greater share of the estate to enable him or her to keep the home or have a “nest egg”.
Loan insurance as part of your estate plan
To avoid leaving a mortgage after death for their loved ones, many people take out life insurance or loan insurance to ensure that these debts are covered. If applying for these insurance policies ensure you carefully read the Product Disclosure Statement (PDS) as we have seen many cases where the insurance does not cover payouts to the beneficiaries. When taking out such insurance is helpful, make sure to do so through a broker who can advise on what the policy does and does not cover and if necessary seek a competitive policy alternative.
Specific gifts of money to cover the mortgage in estate plan
You can set aside a sum in your Will to cover your mortgage. If you know roughly what your mortgage is likely to be and you have sufficient assets to allow it many people could look to leave a specific sum to the beneficiary that will inherit the property to ensure they can cover the mortgage.
It is important that you seek appropriate advice to ensure that your Will is set up to ensure this happens.
Alternatively you could include an express direction in your Will that your mortgage be repaid from the estate. This could be more practical as your mortgage will reduce over time and allowing flexibility for your executors to pay this off with a variety of assets that are more efficient.
Overall it is best to speak to a lawyer to ensure your Will is correctly prepared so that any gifts you leave are actually gifts and not further problems for your loved ones at an already difficult time.
If you would like to know more about this, take advantage of our free half hour legal consults. They can be done in person or via Skype or telephone conference.