What Can Happen to Your Home If You Die Before Paying Off the Mortgage?
In Australia, a home mortgage is almost always a big debt that takes years or decades to repay. Find out what happens if you die before it’s paid off and what you can do about it now.
Many Australians have a mortgage, and you are probably among them. It is the most significant debt for many, and it might be for you too.
Due to the house prices in Australia, most Australians spend a good part of their life repaying it. Unfortunately, some die before paying it off.
What happens if you have an outstanding mortgage at the time of your death?
Here’s some information about several of the possible scenarios.
The Immediate Aftermath
What happens with your property immediately after your death depends on whether you have a valid will naming one or more beneficiaries of your estate.
There Is No Beneficiary
If you haven’t got a valid will, generally speaking your property will be divided between your relatives. Inheritance laws vary from state to state, so the property might not go to the person of your choice.
Things can get complicated if you have a blended family.
In some states, a de facto spouse and a legal spouse have the same rights. But in other parts of the country, a legal spouse is allocated a more substantial share than a de facto spouse would be.
To prevent complications, you could think about making a valid will with identified beneficiaries. But you have to be over 18 (with a few very limited exceptions) and have sufficient mental capacity to create a will. Also, it is typically the case that you will need two witnesses to sign it to make it valid.
There Is a Beneficiary
If you have named a beneficiary for the property in your will, they will inherit it when you die. With it, they will also inherit any debts tied to it. So if you haven’t paid off the mortgage, the beneficiary will have to take care of it.
In Australia, mortgage debt can be substantial, with the average about $434,000. That can put a heavy financial burden on the beneficiary.
The Lender May Request Full Payment
If you’re the sole borrower under the mortgage, the bank might even ask the beneficiary to pay the mortgage in full. Here’s what typically happens in that case.
The best-case scenario is that there are enough assets to allow the beneficiary to pay off the debt. In that case, they can inherit the property in full after the bank gets all its money back. But it is essential to point out that things don’t always go that way.
If there are not enough assets left to the beneficiary to pay the debt, the beneficiary might have to sell the house (unless they decide to use their other assets to meet the mortgage). Depending on how much of the mortgage remains unpaid, there’s the possibility that they fall short of obtaining enough sales proceeds to cover the mortgage – if this is the case, the bank can sue them for the balance. In that case, they might have to sell other assets to pay the bank.
Such a scenario might put the beneficiary under extreme financial strain. And it might take them a long time to recover after.
Perhaps more commonly, but not always, the bank might let the beneficiary take ownership of the mortgage. They will just continue to pay the monthly amount.
Are My Family Liable for the Debt?
The answer to this question is not a straight yes or no. The family usually is liable, but it depends on a number of factors (and of course on the particular circumstances at hand, so these scenarios and comments are just a general guide).
You Hold the Debt Jointly with a Partner
Most people in Australia co-sign the mortgage contract with their spouse or civil partner. If you had signed your loan with your spouse or partner, they would assume the mortgage. That means they will be responsible for the monthly payments.
Your spouse or partner will not have to sell the house when you die as long as they are able to meet the mortgage repayments. They will also become the sole owner of the property, subject to the mortgage.
There Is a Guarantor on the Mortgage
Some people need a guarantor, usually a family member, to quality for a mortgage. Having a guarantor can also allow them to borrow more without incurring lenders mortgage insurance.
On the flip side, one of the guarantor’s properties might serve as the loan’s security. So in such a case, if you fail to pay the mortgage, the guarantor will have to do so or risk having to sell the property which they provided as security. If you die, unless there is someone else meeting the mortgage repayments, the bank will ask the guarantor of your loan to pay the mortgage. The bank may force the sale of your property if the guarantor doesn’t have the money.
You’ll want to have a contract with your guarantor that outlines how they will pay off the mortgage if you die.
You’ve Secured the Mortgage Against a Family Member’s Asset
If you have secured the mortgage against your partner’s asset, they are likely to have to meet the debt (unless of course you have other arrangements in place for the mortgage to be paid off). If the bank looks to your partner’s assets for repayment, your partner might instead be able to cover the debt with their own money in a best-case scenario. But they may instead have to sell the assets marked as security for the mortgage.
You’ve Named a Beneficiary for the Property
Finally, if you’ve named a family member as a beneficiary for a mortgaged property which you own, they become liable for the debt. They will have to pay off the mortgage in any way they can if they want to retain the property.
If the bank asks them to pay in full, they might have to sell the property. It’s possible the bank might foreclose on the house if the payments are not met.
How Can Life Insurance Help?
Having a mortgage on your house is quite a burden. And if you have yet to pay it off at the time of your death, it might become your family’s burden.
If you worry that you might not be paying off the mortgage before you die, consider taking out life insurance. For the policy, you will name a beneficiary who will get a lump-sum payout.
They can use the money to cover your debts, including the mortgage if they decide to do so. Actually, the beneficiary doesn’t have to use the funds to cover the mortgage. They can do with the money as they please.
The good news is that you can choose to cover enough to pay for the mortgage. That means your beneficiary would be able to inherit the property and also be left with enough to meet repayments (assuming they are the beneficiary for your property under your will as well as the beneficiary of your life cover).
The Mortgage Doesn’t Have to Become a Problem
Dying before paying off the mortgage can be messy. It can also put an unnecessary financial burden on your family.
If you have named a beneficiary in your will for the property, they will become responsible for the mortgage on the property. If they can’t repay the debt, they might lose the property and possibly even other assets. The same can happen to the guarantor if you have one.
If you co-own the house with your partner, they will retain responsibility for the mortgage until it’s paid off.
But if you take out life insurance, the lump sum your beneficiary receives after your death may be enough to cover the loan.
Only one question remains:
To insure or not to insure?
That is a question that only you can answer. You may choose to get some professional advice, or to carefully consider your own needs and circumstances and deal directly with a Life Insurer like NobleOak who can provide you with general advice and product information.
This is general information only and does not take into consideration your individual circumstances, objectives, financial situation, or needs. Mortgage debts and inheritance issues are complex so you may want to consider obtaining financial advice applicable to your circumstances.