Dealing With a Mortgage After Death

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Death is an unfortunate part of our lifecycle. Sometimes we can see it coming through aging or sickness, other times it’s the result of a tragic accident. The death of a loved one is especially hard to handle and so is dealing with the aftermath of it all.

People often joke about being free of debt once they’ve died. Then again, is that really the case? What happens to debt after someone passes away? In particular, what happens to a homeowner’s mortgage?

What is the Probate Process?

Depending on what kind of will your loved one has left behind, there will likely be a legal process that follows, known as probate. This is when the executor of the deceased person’s estate is tasked with paying down whatever debt remains in their name and dividing up any assets amongst the beneficiaries named within said will.

Where Someone’s Will Might Be Kept

Although the deceased’s will may be found elsewhere, it could be stored in their personal safety deposit box at their bank or credit union. In that event, you, as the executor, have the legal right to search the contents of this box for the will, as long as you present a death certificate to the banker, who will supervise the process.

If you cannot find the will there, you can also check with the Vital Statistics Agency, where the deceased may have registered it or directions to where it’s being stored. Under the laws of the Canadian Estate Administration Act, you must then provide copies of the will to any designated heirs or beneficiaries.

The Legal After-Process

Once the will has been located and filed for probate, a legal process will follow, wherein a few different things can occur, including but not limited to:

  • Members of the deceased’s immediate family are permitted to request any adjustments to the will in court. Any proceedings that occur thereafter will be regulated within the bounds of Canada’s Wills Variation Act.
  • During the proceedings, the children or spouse of the deceased person can challenge the terms of the will if they feel that their portion of the inheritance is insufficient or if they haven’t been named at all.
  • The terms of the will may be considered invalid if the deceased was married after the document was created. That said, any benefits that were originally assigned to their spouse will be voided if there was a divorce involved.

The Probate Process: Laws and Taxes

While there are other legal events that may occur during the process, Canada’s probate laws will vary depending on where the proceedings take place. In fact, most provinces and territories have some exemptions if the value of the deceased’s estate is under a specific threshold.

In addition, there are several taxes and legal fees that you’ll have to deal with during the probate process. Most areas of the country tally these costs based on the total value of the deceased’s properties before the executor deals with any unpaid debts or expenses that the estate has accumulated.

Fortunately, any assets associated with the inheritance will not be subject to tax, like they would with estate taxes in the United States. However, the estate is required to pay taxes on whatever income the deceased earned after their passing.

Which Debts Are Subject to Probate?

Thankfully, there are some types of debt that will be excluded from the probate process and collection efforts following the death of a borrower. For example, credit card companies and other sources of unsecured credit products usually declare these debts as losses, since the legal process would be too complicated and expensive compared to whatever small compensation they would receive from it.

On the other hand, being that there are certain assets involved, most mortgage lenders and other secured debt sources will be first in line to receive a payout, so there is definitely more motivation for them to collect.

Mortgage Debt – Death of the Sole Owner 

As a reminder, someone must take responsibility for a deceased person’s unpaid debts once they’re gone. Unfortunately, the same rule applies to whatever mortgage payments remain on their home, which can be particularly problematic when the property has sentimental value or family members still living in it.

Regardless of the terms of the will, many provinces and territories require that these debts go through the probate process. In this situation, the deceased’s estate, including their designated executor, is accountable for most of the outstanding debts.

As mentioned, there are also some creditors that are prioritized for payment in the event of a borrower’s death and mortgage lenders are one of them. The whole process is more straight forward when the deceased was the sole mortgagee.

Estate Trustees

Similar to the executor, an estate trustee is named within a deceased person’s will as someone who is left in charge of various properties. Generally, they’re tasked with holding onto the titles to the deceased’s assets on behalf of any heirs or beneficiaries. They may even be named executor if the will doesn’t specify one or none of the beneficiaries agree to the role.

If and when the estate trustee must take over sole ownership of a home, they will then become responsible for paying any debts and insurance policies still on the property, as well as getting the house appraised and presentable for resale. It will not be possible to sell the home until all debt on the property has been discharged.

Mortgage Debt – Death of a Spouse or Co-Owner

If the home was under a joint mortgage, any property related debts will become the responsibility of the surviving spouse or co-owner. The same can be said for any other co-signed debts. Luckily, at this time, joint mortgages aren’t subject to probate procedures in Ontario, but that may not be the case for the rest of Canada.

If the surviving spouse or co-owner wishes, they can remain on the property and assume the mortgage until they manage to sell it. Alternatively, they may pay down the debt and begin the selling process right away. To avoid any risk of identity fraud, they should also get any co-signed accounts switched to their name only.

Surviving spouses should also be careful because if they choose to renew their mortgage rather than pay it off, they may have to reapply using their own financial health and creditworthiness, which can be difficult. Not to mention that if they don’t qualify, the lender may ask for full payment immediately.

Mortgage Insurance vs. Life Insurance

If you think your family members won’t be able to handle your household debt after you pass away, it’s essential to set up a basic term life insurance policy in advance, which should help clear any leftover payments. This is especially true if it was originally a joint mortgage that you share with your spouse or common-law partner.

Although mortgage insurance has the same principle, it may not be the best option because your family’s final payout amount is likely to decrease as the mortgage is paid down. Similarly, credit card balance insurance can be helpful but quite unnecessary, seeing as the price will vary according to the deceased’s unpaid balances.

This, of course, isn’t the case with life insurance, so a surviving spouse, heir or beneficiary could always use the deceased’s non-taxable life insurance payment to consolidate their remaining mortgage payments or other high-interest debts.

Positive vs. Negative Equity

It’s also possible that a deceased person’s home is worth more than they owe on the property. Whatever equity remains can go directly to the heirs or beneficiaries once they decide to sell or take over the mortgage.

However, if the mortgage is more than the home’s value and no one is able to cover the unpaid debt, the executor and mortgage lender may be able to set up a short sale. While this can result in a huge loss for the seller, at least they can quickly get rid of a home that’s costing them too much.

If there are no heirs or beneficiaries, or none of the existing ones can take over the mortgage, the lender will foreclose on the home and sell it at a later time.

What Happens to a Reverse Mortgage if You Die?

Reverse mortgages are for homeowners who are at least 55 years old and want to take out a mortgage loan that is secured against their equity. This is commonly known as an “equity release” and allows you to access up to 55% of your home’s current market value without having to sell it or make payments until the full mortgage balance is due.

Similar to a regular mortgage, the surviving homeowner will have to deal with the final reverse mortgage debt if they decide to sell the home. If not, they can stay in the home and won’t have to make payments until the final mortgage payment is due.

The Bottom Line

In your later years, it becomes particularly important to consider investing in life insurance and speaking with your family about what will happen to these things should you pass away. It’s also essential to speak with one or more professionals about drawing up your will so you can leave something behind for your family other than mortgage debt.


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