When you’re buying your dream home and getting everything organised, you probably don’t want to think about death. However, it’s important to know what will happen with your homeowner loan if the worst happens to you or your partner.
When someone passes away, their debts will typically have to be settled by their estate. Whoever has been left in charge of the estate, such as the executor, will have to arrange repayment of outstanding debts. However, homeowner loans can be more complicated than standard debts, especially if you have bought a property with someone else.
If you’re wondering what will happen with a mortgage when the property owner dies, our guide can help answer the most pressing questions.
What happens to debts when someone dies?
A very common question is “Does your debt die with you?” Unfortunately, no. When people die with debts, these debts will have to be paid off by the estate. The exact order in which debts must be paid off first is down to the priority order. If the money and assets run out, then most standard debts will go unpaid, unless there is someone who has co-signed the loan or agreed to make payments if the borrower can’t, such as a guarantor.
What happens to a mortgage when you die?
Mortgages are slightly more complex than standard loans because of their long term nature. If someone has taken out a mortgage loan and bought a home by themselves, this debt will need to be settled by the estate, this may include through the sale of the property.
If you are set to inherit the property, you might have the option of taking over the mortgage to continue paying it off, until you own the house. If you’re unable to make the repayments, you might be able to get a new mortgage with a longer payment term, lowering the monthly payments. Alternatively, you could sell the property and downsize to a smaller house, or switch the loan to a buy-to-let and rent the property. It is always best to seek financial advice from a professional before making any decisions.
Whatever product you decide, to take over the mortgage, you will have to go through the standard application process, where your credit score and income are weighed against the loan to work out affordability.
What happens to a second charge mortgage when you die?
Like a first mortgage, a second charge mortgage is secured against the property, so if the borrower is unable to repay the loan the lender has a legal right to get their money back through the sale of the property. In the case of the property being sold when the borrower dies to clear the outstanding balance, the first mortgage will get repaid first, any monies left after that loan has been paid will be used to clear the second mortgage, and any monies left after that would be paid to the benefactor.
Homeowner loans if you owned a home together
When you own a property with someone else and they pass away, it becomes a bit more complicated to see how the loan will be handled. Depending on the type of mortgage loan, the outcome will be different.
Joint tenants
In a joint tenancy, the property and the mortgage debt automatically fall to the remaining person if one owner dies. This means that the surviving partner will now be responsible for paying off the debt, and they will have to prove to the lender that they are capable of meeting the repayment obligations. If there is a life insurance payout or the deceased’s estate is sufficient, they could use this for the property. If the lender is not convinced that the remaining partner can meet the payments, they could force the sale of the property to cover the remainder of the balance.
Tenants in common
If multiple people have bought a house as tenants in common, the next steps after death will depend on what their will says. This will outline who inherits ownership of their portion of the property and, thus, who has responsibility for paying off the mortgage debt. If this is one of the other tenants, the lender will want to see that they can make the full repayment now expected of them. If the property ownership falls to someone else, this will have to be discussed and negotiated with them, but it could lead to the property being sold.
What happens to homeowner loans during probate?
Probate is the legal process where a dead person’s will and estate need to be checked, confirmed, and validated. This has to happen before assets can be split and used to pay off debts or given to whoever inherits their estate.
During probate, ongoing debts are usually covered by the estate of the deceased person. This can include making regular mortgage payments. However, a lot of mortgage lenders will agree to pause the account during probate. This means that payments don’t have to be made until probate has finished, so executors or beneficiaries don’t have to keep making repayments during this time.
What if you can’t afford the repayments?
If you inherit a property but cannot afford the mortgage payments, there are some options to consider. First and foremost, you could look at selling the property. This will usually let you settle the debt and still have some money left over, either to buy a smaller house, put towards a deposit, or help pay down your own mortgage.
You could also consider:
- Asking the lender for a payment holiday to help you get your finances in order
- Searching for a mortgage with a lower interest rate to reduce your monthly payments
- Increasing the term on the mortgage to lower your monthly payments but increase the years you spend paying it off
- Selling any other assets in the estate to help pay off the mortgage
If you’re unsure how to handle a mortgage debt after a death, you can speak to a personal financial advisor to help you work out the best path. Getting professional advice is crucial. You can also look at homeowner loan calculators to work out what you would have to pay for different term lengths or after paying off a lump sum.
When should you notify the lender?
In order to help everything move forward smoothly, you should tell the lender as soon as possible after anyone named on a mortgage passes away. Different lenders have different policies that they follow after someone dies, and they can tell you what this is at the time if you have not researched it beforehand. A lot of lenders will work with you to handle repayment schedules and possibly agree to payment pauses while probate happens. However, if you don’t tell the lender, the mortgage could be marked as unpaid, which could cause complications later when you want to handle the property ownership.