Most Australians spend a significant portion of their lives repaying their mortgage. Unfortunately, some people die before they can finish paying it off.
Recent surveys have found that over half of Australians die without leaving a will. It’s frightening to think that a substantial percentage of us leave our loved ones in the dark about what we want to happen to our estates.
While outstanding mortgages will never be wiped clean, your heirs or designated beneficiaries will not necessarily ’inherit’ your mortgage either. Who is responsible for paying it off is determined by the laws concerning debts and inheritances.
What Happens To My Debt After I Die?
If You Have A Will
Whether or not you have a valid will identifying one or more beneficiaries of your estate determines what happens to your mortgage immediately after your death. Making a valid will ensures that the law distributes your belongings as you would’ve liked, as well as carrying out any other wishes you included in the will.
If you have a will, you get to make it clear who receives what. If you choose an executor or executors, they will distribute the assets from your estate as you have ordered. If you don’t name at least one executor, your assets will be distributed by a person whom the state’s Supreme Court grants access through an application process known as filing for Letters of Administration.
If you do intend to choose an executor for your will, think carefully about whom you’d want. The individual would be in charge of gaining access to, managing and distributing your property and other assets. This person should be dependable and capable of responding to your needs quickly and efficiently.
In general, if you die without a formal will, your estate will be divided among your family members; however, things can get complicated when you have a blended family. This can open up a whole new world of legal disputes, encourage will contests, and make it easier for others to contest your estate’s distribution.
- To avoid difficulties, consider drafting a will that names specific beneficiaries.
- You must be over the age of 18 (with a few exceptions), and have sufficient mental ability, to make a will.
- In most cases, two witnesses will be required to sign it for it to be legal.
If The Lender Requests Full Repayment Of Your Loan
If you’re the only borrower on the loan, the bank may ask the beneficiary of your will to pay the entire balance.
Here’s how it usually goes in that situation.
- If the beneficiary’s assets are insufficient to cover the obligation, they may be forced to sell the home.
- If the sale proceeds won’t cover the outstanding amount on the loan, the bank may sue for the remaining debt. Your beneficiary may have to sell other assets to pay the bank in that instance.
- If they want to keep the house, they’ll have to pay down the mortgage in whatever manner they can.
The best-case scenario is that your beneficiary has sufficient assets to pay off the debt. In that situation, they will inherit the property in its entirety once the bank has received the balance owed on the mortgage. But it’s important to note that things don’t always go as planned.
If You Hold The Debt Jointly With A Partner
If you are a joint owner of a property when you die, the surviving owners will be responsible for the outstanding debt. Since most people in Australia sign a mortgage contract with their spouse or partner, this means property usually transfers to a surviving spouse or partner (joint tenant) when people die. Joint ownership allows this to happen without going through the courts. A copy of the Death Certificate is usually requested as proof of death. If your spouse or partner is able to make the mortgage payments, they will not have to sell the home.
Remember that property and mortgage transferability regulations vary by state, so limitations and other exceptions may apply in some situations.
If You Have A Guarantor On The Mortgage
Some people use a guarantor to qualify for a mortgage or to borrow more money without paying Lenders Mortgage Insurance.
In a guarantor loan, one of the guarantor’s properties is used as collateral for the loan. If you die, the bank will seek payment from your guarantor unless someone else can pay off the loan. The bank may sell the property if the guarantor does not have the funds. You’ll need a contract with your guarantor that spells out how they’ll pay off the mortgage if you die.
How To Stay Prepared
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. To avoid this, talk to anyone who will be affected by your death and make a firm, legally binding plan. Here are some steps you can take to protect your surviving family members.
In the event of your death, a life-insurance policy will pay a lump sum to the selected beneficiary; most people name their partner or other family members. Also, life-insurance payouts are protected assets. This means that, generally speaking, any insurance payout to your policy beneficiary will be protected from creditors, even if your beneficiary also ends up with your mortgage.
A decent life-insurance policy can usually pay off the mortgage and replace the income you were bringing in to help pay bills, education expenses, and the costs of raising a family.
Mortgage Protection Insurance
In the event of death, sickness, unemployment, or disability, mortgage protection insurance covers your mortgage repayments. This type of insurance is usually more expensive than life insurance. It is not essential to get two types of policies for death protection; however, if you plan to leave your home to a different beneficiary than the one who will receive your life insurance, or if you don’t have income protection or trauma insurance, mortgage cover can be quite useful.
Provide Liquid Cash
Make funds available to your family members, especially if you think they will have difficulty making payments after your death. This will reduce stress and paperwork, and they’ll be able to sell the house for a reasonable amount if that’s what they need to do. They’ll have to pay the mortgage, maintain the property, and keep up with the taxes.
- Ensure your will stays current by updating it once a year or whenever your financial or familial circumstances change.
- Make sure you understand the lender’s policies on what happens if you die.
- Have a signed agreement with any co-borrowers or guarantors that states who is responsible for carrying out the will.
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