What happens to a home loan when someone dies?

Because a home loan is a considerable debt, most lenders won’t write it off if the borrower dies. Who inherits the debt and what options they have to repay it may vary depending on the exact circumstances.

If the deceased left a will, this document should detail their beneficiary or beneficiaries. These beneficiaries will most likely inherit the deceased’s property when they die, and also any debts that are secured by this property, such as the mortgage.

If there is no will, it’s less clear who gets the property and the mortgage. A spouse (by marriage or de facto), surviving children, and other family could all potentially have a claim.

If the deceased and their partner applied for their mortgage together as joint tenants, then ownership should automatically transfer over to their surviving partner upon one’s passing. If they were tenants in common, then the deceased’s share of the property and mortgage would go to the beneficiaries of their will.

If the deceased used a guarantor to secure their mortgage, the guarantor might be held responsible for repaying the loan if the beneficiaries are unable to. The guarantor’s liability depends on the terms of the agreement with the lender and whether the debt can be recovered from the deceased’s estate.

When you inherit a property with a mortgage, you’ll need to decide whether to keep it or sell it.

Keeping the property

If a beneficiary can afford to service the mortgage on their own income and expenses, then they can take over the home loan and keep the property. This could require refinancing the loan to better suit their financial situation.

Alternatively, if the deceased had a valid life insurance policy (such as through their superannuation), the payout could be used to cover their debts, including the mortgage, which may allow the beneficiary to keep the property.

How can you sell the property?

If the beneficiary can’t afford the mortgage on the inherited property, it may need to be sold to pay off the remaining balance. The executor of the estate can contact real estate agents to organise the sale of a property as a deceased estate.

Keep in mind that if the deceased has a reverse mortgage on their home, this would also need to be paid off. This could reduce the money received from the sale of the property.

If the proceeds of the sale aren’t enough to cover the outstanding mortgage balance (such as if the mortgage was in negative equity), then the bank may contact the executor to organise repayment of the remainder, possibly by the sale of other assets.

Inheritance law and estate planning can be complex, and the outcomes may vary greatly depending on your exact personal situation. Please consider contacting a legal professional for more specific advice.

No one wants to leave their loved ones burdened with debt after their passing. Taking steps to plan your estate can offer peace of mind and protect your family’s future.

One way to ensure your family is not left with the financial strain of a mortgage is by taking out mortgage protection insurance. This insurance is specifically designed to help cover mortgage repayments in case of death, disability, or involuntary unemployment. In the event of the borrower's death, the policy can cover the outstanding loan, allowing their family to remain in the home without additional financial stress. Having an adequate life insurance cover can also help cover the mortgage repayments in case of the death of the borrower.

Another important step you may take is drawing up a will to ensure a smooth transfer of your assets. A will ensures your assets, including your property, are distributed according to your wishes. You can also appoint a trusted executor to manage and distribute your estate effectively.

By taking these steps, you can secure your family’s financial future and ensure they are protected during challenging times.