Losing a loved one is a difficult time, and dealing with their assets can make it even more overwhelming. Whilst inheriting a property can be a blessing, when there’s a mortgage involved it becomes a little more complex. Navigating mortgage assumptions and even multiple heirs can be confusing. To help you better understand the process, we’ve pulled together this useful guide on what happens to a mortgage when someone dies.
First, you need to understand the terms you’ll come across when dealing with a loved one’s assets. When a person dies, everything they leave behind is known as their estate. This can include savings, jewellery, property and vehicles.
Whoever is dealing with the estate is known as an executor or administrator. An executor is named in the Will and receives a Grant of Probate. If there isn’t a Will, next of kin can apply to the court to be appointed as administrators. Administrators receive Letters of Administration.
The process of dealing with an estate can be complex, especially if that person has accumulated debt during their lifetime. If the person who died owes money on credit cards, loans, or household bills, then repayments will typically come from the estate. This can also be true of mortgages, but different scenarios impact how a mortgage is repaid.
When we die, our debts remain. With mortgages, the executor or administrator of the estate is responsible for paying off the loan. This must happen before any savings are distributed to family members or beneficiaries.
We understand this can be a daunting task, as there are many factors to consider. The type of mortgage, how much money is owed, life insurance policies and Wills all play a role in how the mortgage is repaid.
With an interest only mortgage, the repayment strategy agreed between the lender and borrower must be executed by the estate upon death. However, if the repayment vehicle relies on assets such as stocks and shares that take time to mature, the property may be sold to repay the balance. This is also the case if the surviving relatives are unable to pay off the mortgage.
What happens with a joint mortgage depends on whether the deceased borrower has a Will, and if the property was owned as a joint tenancy or as tenants in common.
With a joint tenancy, the surviving partner will automatically inherit the property. The outstanding mortgage balance may be covered by a life insurance policy but, if not, then the surviving partner will be responsible for the remaining debt. If this is going to be difficult, you must reach out to your lender as soon as possible. Your lender may be able to help you find a more affordable alternative – such as extending your mortgage term or switching to an interest only mortgage.
If you’re a Marsden mortgage customer, you can contact our Bereavement Line on 01282 525253* for more information.
When you own a property as tenants-in-common, ownership rights will depend on who the deceased partner has left their share of the home to in their Will. If there’s no Will, then the deceased’s share of the property becomes part of the estate and must be distributed following intestacy rules (External).
If the property in question is a rental property with a Buy to Let mortgage, the property is usually passed to the surviving spouse/partner or the beneficiaries in the Will. The new landlord(s) will need to be assessed for a new Buy to Let mortgage and have new tenancy agreements drawn up in their name. This can be a complex process and we’d urge you to seek advice from a qualified tax advisor and mortgage broker to ensure you fully understand the situation and your responsibilities.
Assumption of a mortgage after death means that you’re taking over the responsibility of an existing mortgage. The benefit of assuming a mortgage is that the new borrower could take advantage of existing mortgage terms – for example, to get a lower interest rate or a due-on-sale clause exemption - without applying for a new mortgage.
It’s important to note you don’t have to assume a mortgage. When you inherit a property, you become the owner. However, the mortgage obligation remains with the original borrower unless you formally assume the mortgage. You can still make payments towards the loan, but the legal obligation to pay off the debt sits with the estate.
Bear in mind that if nobody assumes the mortgage and the estate cannot repay the balance, then lenders have the legal right to sell the property to recuperate the debt.
Taking over your parents’ mortgage after they’re gone is possible, but it’s not guaranteed. We understand your parent’s home may hold significant sentimental value for you, but it’s important to consider how this will impact your finances before making any final decisions.
One of the most crucial factors to consider is how you will pay any outstanding debt on your parents’ property. If you’re unable to take on this financial commitment, lenders have the right to force the sale of the property to recover the outstanding balance of any mortgage. However, don’t let this discourage you. In most cases, lenders will understand and appreciate that winding up an estate can take time.
If you’ve inherited the property, you’ll need to go through the standard mortgage process. This involves assessing your ability to afford the mortgage payments. If you can afford the payments, you can then apply for a new mortgage. If your application is rejected, you may need to sell the property, unless you have insurance or savings that can be used to reduce the outstanding debt and make a mortgage in your name possible.
This can happen for several reasons. Firstly, if the sole mortgage holder has died without a Will, then the process can become quite complicated. However, the law does have criteria in place, known as intestacy rules, which decide who inherits the estate.
In this situation, the next of kin can apply for Letters of Administration and once appointed as the administrator, they can value the assets, pay any debts and distribute the estate according to the intestacy rules. Sorting out an estate without a Will usually takes more time. So, the sooner you apply for Letters of Administration, the sooner you can distribute the estate to heirs.
Secondly, if the home is in negative equity, then understandably you may not want to take on the mortgage. It’s important to note that you don’t have to accept everything you inherit – you can ‘disclaim’ it instead. However, be aware that you must disclaim the property right away, as you can’t accept the inheritance and then change your mind later. If you accept the property, then you’ll become responsible for the home and any debt associated with it.
Lastly, if there are no surviving relatives to inherit the property, then the person’s estate passes to the Crown. HM Treasury is then responsible for dealing with the estate.
Like mortgages, any existing debts do not disappear when a person passes away. They’re paid out of the estate before any savings or assets are distributed to family members and beneficiaries. However, if the outstanding debts are high and cannot be paid through savings or smaller assets, then any owned property is usually sold to repay the debt.
More information about what to do when a loved one passes away can be found using the links below:
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Everything you need to know about care home fees and property. Including, who pays for care and whether you may need to sell your home to pay for care.
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