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Handling mortgage debt depends on circumstances at time of death

By Mary Wahbi for AdvocateDaily.com

Your mortgage lives on even after you die, and one way or another, the lender will want to get paid.

That's because mortgages are attached to the property, as well as the borrower. These are secured loans, the lender having the property as security, and lender will look to the estate for payment failing which, the property can be sold by the lender under power of sale proceedings if necessary and the mortgage loan paid off.

As I said in a recent blog post with LowestRates.ca: “Not much will happen when you die, the mortgage isn’t triggered on your death, and isn’t payable then, but it is still your debt,”

This is the typical result as there is rarely a term in the mortgage requiring full payment of the debt on the death of the borrower.

However, handling of that debt depends on the situation at the time of death.

In the case of a sole property owner with a will, an executor takes authority over the estate and the deceased’s assets. The executor’s job is to liquidate the estate and pay its debts and obligations first, before distributing the remaining estate to the beneficiaries.  What that means is that the executor will sell the property, and use the proceeds to settle the mortgage. If, however, the deceased’s will specifically gifts the property to a particular person, assuming there are enough other assets to pay all the debts of the deceased, the executor will transfer the property to the beneficiary in accordance with the wishes of the deceased.

In the latter case, the gift of the property will be subject to the mortgage unless the will says otherwise

If it does, then the estate will have to retire the mortgage. Until either is done, the estate must continue to cover the mortgage payments. If there aren’t enough funds to do that in the estate, the property will have to be sold and the mortgage owing will be paid on the sale of the property.

If the owner does not have a will, someone must seek authority over the estate. The law in the Estates Act provides a list of persons entitled to apply to the court for that role consisting of the spouse, next-of-kin, or a trust corporation.

Once that estate trustee is appointed, their obligation is to liquidate the estate and pay its debts, and typically, that will involve continuing the pay the mortgage if there are funds in the estate to do so, and selling the property as quickly as possible.

If there aren’t funds to continue to pay the mortgage, it will have to be paid off when the property is sold.

It’s a bit simpler for a married or common-law person who bought their house with a spouse. In that case, they quite likely own the property as joint tenants. When one spouse dies, the house is not considered part of the deceased’s estate. The surviving spouse takes full ownership of the property by right of survivorship as a joint tenant, she says.

The property is still subject to the mortgage debt however, and the decision on whether to keep the house and the obligation to continue to pay the mortgage payments, or sell it, lies solely with the surviving spouse.

In the case where a person purchased a home with a friend or other family member, they are more likely to hold the property as tenants-in-common. In that case, no right of survivorship exists. The deceased person’s share of the property becomes part of their estate, and is dealt with either under the deceased’s will if he or she has one, or pursuant to the laws of intestacy. Either way, the mortgage lives on, and is a debt of both the survivor and the deceased.

The executor in that case has a more complicated job in having to negotiate with the co-owner what is to happen to the property, i.e. sale on the market, sale to the co-owner, transfer to beneficiaries.  

Ideally, the parties will have entered into a co-ownership agreement setting out what is to happen in the event of one of their death, but that only occurs in a perfect world.  Either way, the lender continues to be a secured creditor and the mortgage payments must continue to be paid. The estate continues to be obligated to pay its portion.

The bottom line is that when a borrower dies, the mortgage on their property still binds their estate, and must be dealt with. The lender will, one way or the other, get repaid.

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