What happens to my home loan if I die?

In Australia, if you die with a mortgage then whoever inherits your property will have to repay the debt, or sell the property and pay it off. It's worth being prepared for the worst.

Unfortunately, our debts don’t disappear if we die. There are 3 things that determine what will happen if you have a mortgage when you die: your will, your mortgage agreement and your insurance policies.

What happens to a mortgage when the owner dies in Australia?

In the unfortunate event of someone passing away, the mortgage or debts they carry don't die with them. The bank will want the loan to be settled. In most cases, your mortgage will be transferred to:

  • your co-owner, who automatically assumes the mortgage and is responsible for the remaining debt
  • your estate, where your debts are paid off using your assets
  • your next of kin or beneficiary, as outlined in your will.

The bank has the right to request the full payment of the loan in full from this beneficiary, though there are other options. Whoever inherits your property will generally do one of the following:

  1. Sell the property to pay off the mortgage and pocket the leftover money.
  2. Continue to own the property and repay the mortgage.
  3. Sell the other assets in the estate to pay off the mortgage.

Is the next of kin legally responsible for debt?

The beneficiary, which many be the next of kin or the spouse or another beneficiary, becomes responsible for the debt via the deceased's estate. Problems can arise comes if the property and your other assets can't cover the whole debt. For instance, if your property is worth $500,000 but your outstanding mortgage is $600,000, there will be a shortfall of $100,000 remaining.

The bank will generally continue to pursue recovery of the balance of the mortgage still owing from the deceased estate.

According to solicitor Rod Cunich, consulting principal at Keypoint Law, mortgages have an 'all money' clause, which means that if the deceased estate can't pay the bank – ie. the debts are greater than the assets – it may be insolvent and become subject to Australian bankruptcy laws.

"You can sell the house to try and pay it off but if there is a short fall, your bank has the right to sue [the estate] and take your other assets to make up the difference," he explains.

In this situation, you as the beneficiary have the option to 'disclaim' the gift, leaving you with nothing – but at least you no longer have to worry about the debt.

How does having a will change things?

  • A will is the key to ensuring your wishes are carried out in the unfortunate event of your death.
  • A will clearly distributes your assets and gives instructions about your funeral and any legal outcomes.
  • A will is considered legal if it's written by someone over the age of 18 who has mental clarity and is signed by 2 objective witnesses. It needs to completely dispose of all of your assets and be up-to-date with your current circumstances.
  • New assets like a business, or a change to your family situation like children or divorce, should be updated in your will as soon as practically possible.
  • You can specify who inherits your property when you die in your will. If you have outstanding debt on your property, then whoever inherits the property (your children, for example) now own the debt as well.
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Expert insight

"It will come down to your Will and Ownership structure. If you have a partner that survives you and has an entitlement to the property, then they will need to assume all repayments and responsibility; you can ensure you have adequate life insurance to ease this burden. However, if there is no partner, the Estate will assume responsibility for ensuring that payments are made. This will come out of any funds remaining in the estate, and whoever inherits the property will need to finance the mortgage across to their names once the estate is in probate. Most often, the property will be sold and the funds will be used to clear the debt. A final note is to ensure that your beneficiaries speak with the bank as soon as possible, as they can support you through the process of getting everything sorted in what is a very emotional time."

Managing broker, GSC Finance

What if you don’t have a will?

If a person dies without a valid will, they are said to die "intestate". In this case, the government employs a default will, appoints an executor of their choice and divides your assets, including your house, according to a particular formula. Each state in Australia has a different process and formula, and it may not be the formula you would choose yourself.

According to Rod Cunich, intestate can get very complicated, especially in the event of divorce and blended families, and the variation in how each state approaches it is huge.

"In NSW, for example, if a person is married but separated and has a new de facto spouse, both are considered spouses with an equal claim to the assets. In another state, the former spouse might get the first $50,000 and then the rest would be divided with the new de facto spouse. It can get messy very quickly."

How insurance can help cover your debts if you die

While your death might mean you are passing on a significant amount of debt and responsibility, you can take steps to minimise or even eliminate that stress right now.

Life insurance

A life insurance policy will pay out a lump sum to the designated beneficiary in the event of your death – usually to your spouse or remaining family members. "Something that many people don’t realise is that life insurance is a protected asset," Cunich explains. "This means it isn’t automatically applied to debt but given to the assigned beneficiary as a lump sum. A good life insurance policy is usually enough to pay off the house and replace the income you were bringing in to cover bills, education costs and the costs of raising a family."

"Keep in mind that the assigned beneficiary is not forced to pay debts with the life insurance amount. If the beneficiary gets bad advice or chooses to spend the money elsewhere, they could still end up losing the house," Cunich warns.

Mortgage protection insurance

There are 2 types of mortgage insurance, but only 1 that works in your favour if you should happen to die. Lenders mortgage insurance (LMI) is compulsory if you borrow more than 80% of the house value but it doesn’t protect you at all. This insurance protects the lender if your house is repossessed.

Mortgage Protection Insurance, on the other hand, protects you and covers your mortgage repayments in the event of death, sickness, unemployment or disability. This form of insurance is generally more expensive than life insurance and it is not necessary to double up specifically for death cover. It can be very beneficial if you are planning on leaving your house to a different beneficiary than who will be getting your life insurance, or if you don’t have income protection or trauma insurance.

Other insurance policies

Other forms of insurance can provide payments if you are injured and unable to work. These can help cover your mortgage repayments. You may want to look at income protection insurance or TPD insurance.

What debts are forgiven at death in Australia?

Mortgages are typically not forgiven at death.

If you incur debt gaining an education, such as HECS-HELP, FEE-HELP, VET FEE-HELP, VET Student Loans and SA-HELP, these are typically cancelled upon the death of the borrower, and the ATO does not pursue them from the deceased person's estate.

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Publisher

Marc Terrano is a lead publisher and growth marketer at Finder. He has previously worked at Finder as a publisher for frequent flyer points and home loans, and as a writer, podcast host and content marketer. Marc has a Bachelor of Communications (Journalism) from the University of Technology Sydney. He’s passionate about creating honest and simple reviews and comparisons to help everyone get value for money. See full bio

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Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio

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