Who is liable for your home loan if you die?

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For most Australians, paying off a mortgage is a decades-long task. But what happens if you pass away before you get a chance to pay it off? 

As with most situations involving debt, the answer will depend on your personal circumstances. Below, we take a look at what you can generally expect in cases where your mortgage obligations outlive you.

Does the mortgage need to be paid back in full?

Unfortunately, debts left behind after you die aren’t usually written off by your creditors. Most of them, including mortgage debt, will need to be paid back in full.

If you’re the only person listed on your mortgage, that means the bank may turn to the beneficiaries named in your will to retrieve the money owed. 

If your beneficiaries can afford to pay, they will inherit the property as originally planned. But if their income and assets aren’t enough to cover the outstanding debt, they may be forced to sell the property.

Things get a bit complicated if you didn’t get a chance to draw up a will. In this case, your assets will generally be divided among family members and next of kin, and the potential for disputes may take an already burdensome process and drag it out further.

What if I have a partner?

If you are survived by a partner who was also listed on the mortgage, it will be up to them to pay off the outstanding balance. The mortgage contract remains but with just your partner listed.

Ideally, your partner will be able to continue making repayments until the debt is paid off. But servicing a mortgage can be difficult on a single income, and in some cases selling the property might prove to be the only workable solution. 

What if I have a guarantor?

A guarantor is someone, usually a parent, who agrees to pay the debts you owe if you’re unable to meet your mortgage obligations. Guarantors are typically required to be home owners themselves, since the equity held in their property is used as security.

If you’ve taken out a loan with the assistance of a guarantor, they will be asked to pay the mortgage in the event of your death (assuming you don’t have a partner that is able to make the repayments themselves).

You and your guarantor should discuss these possibilities and more with a financial advisor prior to entering any agreement. Having a guarantor can be a useful way to secure the property you want, but it’s important that everyone involved understands what’s required of them.

What happens if the sale proceeds don’t cover the debt?

If the value of your home has dropped since you purchased it, you might find yourself in negative equity. This is when the amount you owe on your mortgage is more than what your property is currently worth.

This might happen if you bought at the peak of a property boom and prices have subsequently fallen, or if you overpaid for your home and haven’t had time to build up enough equity.

Whatever the reason, it will add an additional layer of complexity in the event of your death. If your family is forced to sell the property, they’ll be required to pay for the shortfall out of their own pocket.

This can place a significant financial burden on your family, particularly if they don’t have enough cash to pay the bank and are forced to sell other assets.

Examples

Dying with home loan debt and heirs: Joe is a 55 year-old man who dies in an accident, leaving his husband Neil and daughter Becky to deal with a $400,000 mortgage he had yet to pay off.

If Joe co-owned the property with his husband, Neil will take over responsibility for the home loan until it’s paid off. 

But if Joe was the sole owner of the property, whoever he nominated as the beneficiary in his will assume responsibility for the mortgage. This might be Neil, Becky, or some other family member.

If Joe’s beneficiaries cannot afford to repay the debt they might lose the property. 

Dying with heirs and no home loan debt: On the other hand, if Joe had already paid off his mortgage by the time of his death, Neil and Becky would only have to worry about utility bills and council fees. 

Keep in mind that if Joe was the sole owner of the property and named his family in his will, then Neil and Becky would have to pay a concessional rate of stamp duty. Each state has different rules around stamp duty, so make sure to read up on them.

Dying with home loan debt and no heirs: If Joe passed away with money owing on his home loan but no next of kin to pay it off, the bank will most likely take possession of the property. In these cases, the bank sells the property to recover the money it’s owed. 

How can I avoid any messy financial situations?

Death may be unpleasant to think about, but it’s necessary to plan ahead so you can avoid burdening your family down the track. One of the best ways to safeguard your family’s finances in the event of an unexpected death is having life insurance.

This will pay out a lump sum to the beneficiaries you nominate in your policy. So instead of assuming your debt (and all the stresses that come with it), your family can use the payment they receive to pay off the mortgage and retain the home.

Of course, you’ll need to make sure you have the right level of cover. Ideally, the payout should cover the mortgage debt as well as any other living expenses (including future costs like your children’s education).

For more information, visit our life insurance page. And if you’re looking to compare mortgage options, visit our home loan comparison page, where you’ll be able to filter your search by rate and type.

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