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What happens to my home loan if I die?

Knowing the procedure for dealing with debt after death can help you be prepared, so you can make sure your loved ones are looked after.

October 30, 2020 • 4 min read

purple flowers planted in ground

No one likes to talk about death, there’s so many questions and unknowns (and we’re not the right people to ask). However, when it comes to home loans, we’ve got you covered. But what happens to your home loan if you die? Now that’s something we can help you with.

Understanding the way debt works after we pass on is something you may not have given much thought to (unless you’re a super dooper planner who plans for everything), but it’s kind of important. Considering the future and the possible debts you’ll leave behind is a critical step to ensuring your loved ones are financially taken care of in the unfortunate event of your death.

So, what happens to my home loan if I die?

Generally speaking, your home loan will still need to be paid back (darn). Which means someone will be responsible for paying it off. This person will differ depending on your situation.

Co-signed loans

Most commonly, a home loan is co-signed with a spouse or partner. For these couples, your process is relatively straightforward. The co-owner takes ownership of the house, the home loan, and is responsible for repaying the remaining debt (whoops, sorry honey).

Your heirs inherit your throne… I mean, loan

The good news is that your beneficiaries don’t automatically inherit debt they haven’t co-signed for. The bad news is that if they inherit your house, they also inherit your home loan – they’re kind of a package deal. This means the beneficiary that inherits your home will take on your home loan with the exact same interest rate and repayment as you were paying.

And in the event of your death, the bank has the right to request full repayment of the home loan from the beneficiary. They will usually use your other assets (savings, super, other properties) to pay off the home loan in one of the following ways:

  1. Ideally, the value of your assets is enough to pay off the home loan allowing your beneficiary to inherit the property in full.
  2. Your beneficiary can legally inherit and take ownership of the house, additionally taking responsibility of your home loan. In many cases the beneficiary will refinance your loan – especially if they can get a lower interest rate or reduced monthly payments.
  3. If possible, the home loan may also be paid off with the money from your life insurance policy.

Selling the home

Positive equity:

In some cases, your beneficiaries may not be able to take over your home loan. In this scenario they would usually opt to sell the property, pay off your remaining debt with the proceeds of the sale and distributing any remaining balance in accordance with your will.

Not so positive equity:

Unfortunately if you don’t have enough equity or other assets to cover your home loan, it could pose a problem for your beneficiaries (if they can’t take over the loan themselves). In the event that the sale of your home won’t cover your home loan (don’t forget there are some costs to selling that also need to be accounted for), and nobody can take over the repayments, the executor of your will may be able to negotiate with your lender to accept less than the full loan amount (also known as a short sale). But failing this, the lender will likely foreclose on (take possession of) the property and try to sell it at auction. It’s better for everyone if it doesn’t come to this though.

How to prepare

The boy scouts are on to something, you should always be prepared. When it comes to taking care of your home loan after you die, here are some things you can do:

  1. Consider the type of home loan you have
    Get the home loan that’s right for you. While you may not get a say in whether your house is kept or sold after you’re gone, you can make the decision easier by getting a home loan that suits your needs. Take time to consider any options (fixed rates, offset accounts, etc.) that could help increase the equity in your home.
  2. Ownership options
    Pre-elect the executor of your assets through the creation or alteration of your will. Ensure that the executor is aware and willing to take on the responsibility, and make sure your will is updated regularly with your wishes clearly stated.
  3. Talk about it
    Discuss any outstanding debts with your lawyer and try to manage your debt as best you can now. Discuss your intentions with anybody who will be affected by your death to help prepare them. It’s not fun, in fact it can be downright difficult, but communication goes a long way towards preventing confusion and heartache when the inevitable happens.
  4. Consider insurance
    Consider getting life insurance to help your loved ones manage your estate after your death. And if you already have life insurance, take the time to review your policy to make sure it’s appropriate for your circumstances.

Well that’s enough doom and gloom talk for now. Now you’re in the know, go ahead and get prepared. Then sit back and relax, knowing you’ve done your best to help out your loved ones.

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Diem Tran

By Diem Tran

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