What Happens to Your Mortgage When You Die?

A home loan is almost always a big debt that takes years or decades to repay. There are currently around 3.3 million mortgaged households in Australia, and the average loan term is 30 years.

Additionally, the cost of housing in Australia is at a record high, with Australia’s median house price rising to $1.113 million (as of April 2024). Because so many Australians have large mortgages, it’s a reality that sometimes people die before they finish paying off their loans.

This article will provide information about what happens to a mortgage when you die, and what you can do to prevent financial hardship for your loved ones in the event of your death.

We’ll also provide answers to these commonly asked questions:

• Can you inherit debt in Australia?
• Does your mortgage die with you?
• What happens if you inherit a house with a mortgage?
• What happens to a joint mortgage when someone dies?

Does your mortgage need to be paid back in full before you die?

Essentially no, your mortgage debt doesn’t need to be paid off before you die. However, this doesn’t mean that the debt automatically disappears after your death – it may become someone else’s.

If you have a partner and/or children who are financially dependent on you, they may be directly affected if you pass away before your mortgage is paid in full. If this is something you are worried about, it’s advisable to look into Life Insurance options.

What happens if you have an outstanding mortgage at the time of your death?

In this section, we’ll provide more detail on what happens to a home loan after death. First, we’ll discuss what usually happens in the immediate aftermath, and then we’ll explore scenarios in which there is and isn’t a will.

1) The immediate aftermath

What happens with your property immediately after your death depends on whether you have a valid will naming one or more beneficiaries of your estate. (Useful information about creating a plan for how you’d like your estate to be handled after your death can be found in the Moneysmart guide to wills and powers of attorney).

Part of the process of preparing a will is officially nominating a person who will act as the executor of your estate. The executor gathers in the assets, pays any outstanding debts and taxes and distributes your assets according to your wishes.

In the immediate aftermath of your death, the executor will need to obtain a copy of your death certificate and notify your mortgage lender. At this point, your mortgage lender will then assess the situation – often placing the mortgage temporarily on hold.

If your property was owned in a joint tenancy (for example with your spouse) they assume full ownership of the property and full responsibility for the loan and must continue making mortgage payments after your death. If the property is owned as a tenant in common (eg you own a percentage with a commercial partner) the other partner does not assume responsibility for your mortgage.

2) There is no will

If you die without a will, you’ll have died ‘intestate’. The court may appoint an administrator to manage the estate. The administrator’s duties are similar to those of an executor, including notifying the mortgage lender of the death and managing assets to settle any debts.

The administrator charges for this service and those fees come out of the estate. Administration fees can be costly and can consume a large portion of an intestate estate.

Inheritance laws vary from state to state, and the existence of a de facto spouse, a legal spouse and dependants can make things more complicated.

To give you a general idea of how assets are split between partners and family members, the NSW Government’s article dying without a will provides useful information. The bottom line is, things can get messy and expensive if there isn’t a will. So, it is advisable you create one to prevent complications for your family.

3) There is a will

If you have named a beneficiary for the property in your will, they will inherit it when you die. They will also inherit any debts tied to it. So, if you haven’t paid off the mortgage, the beneficiary will assume responsibility.

The beneficiary may decide to take full responsibility for the mortgage and continue to make payments. If they’re not in a financial position to take over the mortgage, they’ll probably have to sell the property.

In Australia, mortgage debt can be substantial. According to a Financial Times report published in February 2024, the average loan size for Australian homeowners is $626,055. A loan of that size can put a heavy financial burden on your beneficiary, especially in circumstances where there’s no Life Insurance payout for them to rely on.

4) The lender may request full payment

If you’re the sole borrower under the mortgage, the bank might ask your beneficiary to pay the mortgage in full.

Here are two possible outcomes in this situation:

• Best-case scenario: There are enough assets to pay off the debt. In that case, your beneficiary can inherit the property clear of the loan after the bank gets all of its money back. Please be aware, however, that things don’t always go that way.
• Worst-case scenario: The beneficiary might have to sell the house (if the beneficiary accepts the gift). Depending on how much of the mortgage remains unpaid, there’s the possibility that they’ll fall short of obtaining enough from selling the property to cover the mortgage. The bank can continue to pursue recovery of the balance owing from the deceased estate as an unsecured debt. If the deceased estate can’t pay the bank, it may be insolvent and become subject to Australian bankruptcy laws.  Alternatively, if the beneficiary cannot pay the mortgage, the beneficiary could disclaim the gift, leaving him or her with nothing.

Perhaps more commonly, but not always, the bank might let the beneficiary take over the mortgage. They will just continue to pay the monthly amount.

Do you inherit debt in Australia?

Can you inherit debt from a family member who has recently died? The answer to this question is not a straight yes or no. It depends on a number of factors (and of course on the particular circumstances at hand; this article is just a general guide).

In this section, we’ll look at some common scenarios including inheriting a house with a mortgage and transferring a mortgage after death.

We’ll also provide answers to these FAQs:

• What happens to a joint mortgage if one person dies?
• Do you inherit your parents’ debt in Australia?
• Can you inherit mortgage debt?
• What happens to debt when you die in Australia?
• What happens to a mortgage when the owner dies in Australia?

1) You hold the property jointly with a partner

So, what happens to a joint mortgage over joint property if one of the mortgagors dies?

If you signed your loan with your spouse or partner, they will have to take sole responsibility for the mortgage. That means they’ll be responsible for meeting the monthly payments.

As long as your spouse or partner can meet the mortgage repayments, they won’t have to sell the property when you die. They’ll also become the sole owner of the property, subject to the mortgage.

However, if the survivor is unable to meet the mortgage repayments on their own, they will have to contact your mortgage lender to see if the loan can be restructured in some way. If this option isn’t possible, they might need to sell the property to repay the mortgage.

2) There is a guarantor on the mortgage

What happens to the person who acted as guarantor for your mortgage?

The guarantor’s role is to take responsibility for your mortgage debt if you fail to meet your financial obligations. If you die, unless there is someone else meeting the mortgage repayments, the bank will ask the guarantor of your loan to pay the mortgage.

Failure to fulfil this obligation can have a negative impact on the guarantor’s credit rating and financial stability. The property is also likely to be sold if no one can meet loan repayments. Furthermore, if there is a shortfall on sale of the mortgaged property, and the guarantor used their own property as the security for their guarantee of your mortgage, they’ll be at risk of having to sell this property if you die.

Because of these factors, you may wish to discuss with your guarantor they will pay off the mortgage if you die.

3) You’ve secured the mortgage against a family member’s asset

What happens in situations where you’ve secured your mortgage against a family member’s asset? What are the repercussions for this family member if you die?

In this situation, the family member will have to meet your debt in some way (unless you have other arrangements in place for the mortgage to be paid off) as discussed above.

• Best-case scenario: The family member can cover your debt with their own money (or via borrowing with a mortgage).
• Worst-case scenario: The family member will have to sell their asset to cover your mortgage debt.

4) You’ve named a beneficiary for the property

Finally, if you’ve named a family member as a beneficiary for a mortgaged property that you own, they’ll have to pay off the mortgage (in any way they can) if they want to retain the property.

If the bank asks them to pay the outstanding debt in full, they might have to sell the property. It’s possible the bank might seek possession of property if the payments are not met, allowing it to sell the property to recover the outstanding loan balance.

How can life insurance help with inherited mortgage debt?

If you haven’t paid off your mortgage at the time of your death, it can become your family’s burden.

However, if you have a valid Life Insurance policy at the time of your death, nominated members of your family will receive a lump-sum payout that can help to alleviate financial stress.

They can use this money to cover your debts, potentially including your mortgage if they decide to do so. It is up to them how they decide to spend the money.

With NobleOak’s Life Insurance, you can choose enough coverage to pay for your mortgage (subject to our underwriting guidelines). That means your beneficiary would be able to inherit the property and be left with enough money to meet repayments (assuming they are the beneficiary for your property under your will as well as the beneficiary of your life cover).

The mortgage doesn’t have to become a problem

Dying before paying off a mortgage can be complicated. It can also put unnecessary financial strain on your family.

But if you take out Life Insurance, the lump sum your beneficiary receives after your death may be enough to cover the loan.

You can find out more in our article: Why holding Life Insurance cover may help you protect your home for your family.

Award-winning Life Insurance

You may choose to get some professional advice or to carefully consider your own needs and circumstances. If you choose to take out Life Insurance, one of the options is to deal directly with a Life Insurer like NobleOak who can provide you with Life Insurance product information.

NobleOak’s insurance calculator provides insight into how much Life Insurance coverage would be suitable for your situation. You can also use our online quote tool.

Resources and references:

• Finder: What happens to my home loan if I die?
• Australian Institute of Health and Welfare: Home ownership and housing tenure
• Domain: Australian house prices hit record high of $1.113 million
• Forbes: What Is The Average Mortgage In Australia?
• Moneysmart: Wills and powers of attorney
• NSW Trustee and Guardian: Dying without a Will
• NobleOak: Six Important Costs Your Family Faces If You Pass Away

Disclaimer: Any financial product advice is general in nature only and does not take into account your individual circumstances, objectives, financial situation, or needs. Before acting on it, please consider the appropriateness of the information, having regard to those factors. Any third-party websites or tools referred to are subject to their own terms and conditions and NobleOak Life Limited makes no representation or warranty as to any information on those websites. Persons deciding whether to acquire or continue to hold life insurance issued by NobleOak Life Limited should consider the relevant Product Disclosure Statement and Target Market Determination for the product. Please also consider NobleOak Life Limited’s Financial Services Guide. NobleOak Life Limited ABN 85 087 648 708 AFSL 247302.