Do my loved ones take on my mortgage?

KEY TAKE-OUTS

• Many Australians who own real estate will have a mortgage attached to their property.
• Some people may not wish for their house to be sold when they pass away and would rather their loved ones receive the property.
• The mortgage will need to be paid from estate assets or refinanced to the person receiving the property before the transfer occurs, and this may cause some issues.
• In order to ensure you have control over your real estate and the mortgage, it is suggested that you specifically write your intentions regarding any mortgage in your Will.

Many Australians who own a property have a mortgage attached to it and you may be wondering what happens to the mortgage when someone passes away.

As a rule of thumb, a mortgage is a liability of the estate and must be paid by the funds held by the estate first. Historically, the mortgage would automatically be paid from the funds held in your estate without question, which meant that if the estate did not have enough funds to payout the existing mortgages, then the property would need to be sold in order to do so.

However, some families may not wish for their family home to be sold and would prefer to have someone else take on the mortgage (refinance it) rather than having their estate pay for it with the cash assets. This approach is made possible by Succession Law, which provides for the mortgage to automatically pass over to the person inheriting the property, unless there is written direction to the contrary in the will.

You may wonder why someone would ever consider passing on a mortgage to someone? However, in our experience, some people may feel that their home is sentimental and wish to ensure that it is kept within the family. They may be worried that their estate cannot payout the loan on the property and in this instance, they give a direction in their will for the property (together with the mortgage that is attached to it) is transferred to the person who they have named to receive the property.

It is important to remember that it may not be a simple task to pass over your mortgage, as there is a third party lender involved, such as a bank. It is the bank’s role is to ensure that the person receiving the real estate has the capacity to refinance the mortgage into their name. If they are unable to refinance the property, then the bank or a financial advisor would need to provide advice regarding the possible solutions to this issue. In some cases, the property may ultimately need to be sold if there are no other alternatives.

The importance of preparing your will and specifying this issue is to ensure that you do have a say with what happens to your mortgage, otherwise, the default position will prevail. Accordingly, to avoid any confusion or doubt, we suggest that you clearly state your intentions regarding your property and mortgage in your will. We can provide tailored advice and help you to specify whether you would like your mortgage to be paid from your estate or whether you would prefer your mortgage to be passed to the person receiving the property.

Governing Law: Locke Kings Act (embodied in Section 145 Conveyancing Act 1919).