Mortgage debt after death; what you need to know
What happens to your mortgage after you die?
Whilst you probably have not thought too much about the possibility of dying before your mortgage is paid off, it is a real possibility and something that you should be aware of as it may greatly impact on the loved ones you leave behind. Death is not a nice thing to think about but being prepared can alleviate stress, delays and costs for your loved ones.
Usually, your debts, including your mortgage, will need to be paid back from the Estate prior to any major bequests being made to beneficiaries (under a Will or under the laws of intestacy).
Ordinarily, the executor of your will will use your estate to pay off the mortgage however there may be other circumstances that arise.
If there is enough money within the estate to pay off the mortgage, the beneficiaries may decide to pay off the mortgage and keep the property. It is also possible for the Property to be left to an individual who inherits it under the Will. If there are not enough funds to discharge the mortgage then the property may be sold and proceeds divided according to the Will however, if the beneficiary wishes to retain the property then they will have to assume the balance of the mortgage and refinance.
This may likely arise in situations where a spouse dies and leaves the property to the surviving spouse (if the property was solely owned by the deceased or owned as tenants in common with the other spouse). In that case, there may be significant duty implications on the transfer of the property.
The Office of State Revenue ("OSR") assess these types of transactions based on the amount of the mortgage being assumed under the transfer and consider same as "consideration". Meaning that rather than nominal duty ($20) being payable (which would arise in situations where the property is mortgage free), duty will be payable on the consideration; that is, the amount of the mortgage being assumed. This could result in hundreds of thousands of dollars being paid towards duty. To avoid this situation, there may be things that we can put into place now.
Note that if the beneficiary decides to sell the property, the mortgage will have to be discharged (paid in full) and no duty is payable (other than duty payable by the purchaser).
As a case example:
If spouses own a property together as "tenants in common", we could arrange for a transfer of interest in title so that the spouses own the property as "Joint Tenants" meaning that the surviving spouse automatically inherits the property with no need for a transfer to be stamped by the OSR. There will still be the need to refinance so you should ensure that there are sufficient assets/cash to satisfy the mortgage debt if you wish for your spouse to inherit the property free of mortgage after you pass away. To ensure that, you may like to look into a sufficient life insurance policy.
There are many matters to consider and put into place prior to your death that could reduce financial stress and worry to your loved ones when you pass away so whilst you may not wish to cast your mind to it, it is worth it in the long run.
Contact us today to put your Estate affairs into order.
If you require assistance with financing/refinancing contact Luciana Martino at Alchemy Finance.
Author: Danielle De Roberto
Senior Wills & Estates Lawyer