What Happens to Your Home Loan When You Pass Away? Understanding Mortgage Implications
A mortgage can seem like a lifelong debt (the word “mortgage” does mean “death pledge” in French!) but if managed correctly, you’ll likely spend a fair portion of your later years mortgage-free. Unfortunately, this isn’t always the case, and some people may pass away before fully paying off their home loan. So, what happens to your home loan after you pass away? And who inherits a home loan?
Transfer of Debt
When someone with a mortgage passes away and doesn’t have any safeguards or plans in place, the remaining debt is paid from the person’s estate, using existing funds and assets. If the estate doesn’t have enough to cover the full amount of the remaining debt, the debt is transferred to whoever inherits the home. For this reason, it’s important to know who will inherit the responsibility for your home loan after your death.
What is an Estate?
An estate doesn’t just include your home — it’s a collective term for all the assets and liabilities a person has to their name [1] (MoneySmart, 2024). Assets can include everything from artwork and businesses to shares and cars. Liabilities include credit cards, student loans, personal loans, and, yes, home loans.
What Happens to Your Loan if You Have a Will
A will is something everyone should have, as it ensures assets and responsibilities from your estate go to the right people.
If you have a will, you’ll nominate a beneficiary, who’ll inherit the home along with the outstanding mortgage. An executor of your will ensures the property goes to the nominated person.
What Happens to Your Loan if You Don’t Have a Will?
By default, the property goes to your closest living relative. This could be a child, spouse, parent, or another close family member.
However, while this is the most common outcome for sole property owners, it’s not the only possibility. It can become more complex when two or more people co-own a property and share responsibility for the mortgage.
Property Co-ownership
Property ownership can be shared between two or more owners, meaning the mortgage is split. There are two common arrangements for co-ownership of property, and each can affect the course of action when it comes to survivorship.
![(H3) Joint Tenants The most straightforward beneficiary. A joint tenant is someone who purchased the property and took responsibility for half of the loan, this is a popular choice for marriages and family members looking to ensure that, in the event one owner dies, the other can retain ownership of the property. According to the ATO “Joint tenants have an equal share in the ownership of an asset. If a joint tenant dies, the other tenant (or tenants) has a right of survivorship. The deceased tenant's interest is not an asset of their estate.[2] “(ATO, 2024). Essentially, the surviving tenant or tenants acquire the deceased interest, and its responsibility. The responsibility of going from holding 50% of an asset to 100% of an asset can be incredibly stressful, particularly when the survivor is likely dealing with the loss of someone close to them. Creditors will likely pursue the debt owed by the deceased tenant, and if unable to be paid, may try to force the sale of the property. If the deceased joint tenant lived in the property, surviving owners may be eligible for a Main Residence Exemption on the acquired ownership of the property, sidestepping the Capital Gains Tax [3] (ATO, 2024). (H3) Tenants in Common Tenants in common are like joint tenants, in that both are examples of co-owning a property. However, while a joint tenant has equal ownership of a property, tenants in common have a share of the property, which doesn’t have to be 50/50. Additionally, while joint tenants are unable to nominate someone outside the co-ownership arrangement to inherit the property, tenants in common can elect another beneficiary, or sell their stake in the property without having to discuss it with the other owner. While this is a risk to the agreement between tenants in common, this can be a relief to a surviving co-owner if the other owner passes away, as it means they will likely have someone else to take on the share of the property. A deceased tenant in common can also have their share as part of their estate, meaning even if the deceased doesn’t nominate a beneficiary, some or all the cost may be covered by the existing estate. [4] (Campbell, 2024).](https://www.moneyquest.com.au/wp-content/uploads/2024/11/Blog-infographics-30-300x185.webp)
[2] (ATO 2024), [3] (ATO 2024), [4] (Campbell 2024)
What Can You Do?
Draft Your Will
As mentioned earlier, a will ensures that your assets go to the person or people you want them to. This document explicitly states how you want your estate distributed after your death. In practice, drafting a will is something everyone should do. It also allows you to have a conversation with someone about inheriting your home and mortgage, ensuring they are aware of and prepared for this responsibility.
Take Out Life Cover
Life insurance can help cover your mortgage and other debts. Some insurance providers pay out a lump sum upon your death, which can be used by your estate or family to cover expenses [5] (MoneySmart, 2024). This can be a straightforward way to reduce any stress about leaving your loved ones with a significant financial burden.
Review Your Mortgage Repayments
There’s no accounting for freak accidents, but if you are reaching the later part of your life, and are concerned your home loan won’t be repaid in time, you can always reach out to a MoneyQuest mortgage broker, and look into refinancing to a higher monthly mortgage repayment if you have additional funds, or look for a loan that garners less interest. This means your home loan would be paid off sooner, and you get to spend more of your life mortgage-free. Secure your family’s future and speak to us, to see if this is the right choice for you.
[1] Moneysmart, Estate. Viewed 14th November 2024.
[2] Australian Taxation Office, Joint Tenants, Australian Government. 18th June 2024. Viewed 14th November 2024.
[3] Australian Taxation Office, Eligibility for Main Residence Exemption, Australian Government. 5th November 2024. Viewed 14th November 2024.
[4] Campbell, Jack. Is tenancy in common ‘Australia’s best kept secret’? brokerdaily. 18th July 2024. Viewed 14th November 2024.
[5] Moneysmart, Life Cover. View 14th November 2024.
Disclaimer:
This article is written to provide a summary and general overview of the subject matter covered for your information only. Every effort has been made to ensure the information in the article is current, accurate and reliable. This article has been prepared without taking into account your objectives, personal circumstances, financial situation or needs. You should consider whether it is appropriate for your circumstances. You should seek your own independent legal, financial and taxation advice before acting or relying on any of the content contained in the articles and review any relevant Product Disclosure Statement (PDS), Terms and Conditions (T&C) or Financial Services Guide (FSG).
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