Does a Mortgaged House Need to Be Sold after the Owner Dies?
26 November 2018
By Probate Solicitor, Mahua Jana
When an individual passes away, their assets and liabilities need to be dealt with, including their house and any outstanding mortgage on this. In most cases if the property is mortgaged and if it is held in the sole name of the deceased, it is likely that the property will need to be sold in order to pay off the mortgage. However, there are some instances where this may not be necessary.
In this article we will be focusing on a property that was owned and lived in by the deceased and not one that is rented out by them.
What to Consider when Dealing with a Mortgaged Property
1. Are there sufficient funds in the Estate to pay off liabilities (debts)?
This is a major factor as this can determine whether or not the property has to be sold, even if this may not reflect the wishes of the deceased.
The Personal Representative must ensure that all liabilities (debts) of the deceased are paid before distributing funds to the Beneficiaries. This includes things such as loans, utility bills, credit card balances, etc. If there are sufficient funds in bank accounts to cover these liabilities then there are usually no issues. If however there are insufficient liquid assets and the majority of the Estate value is tied up in the property, then the Personal Representative will need to consider selling the property to pay off the liabilities.
If a property is mortgaged then the outstanding mortgage is also a liability of the Estate. Again, if there are sufficient funds elsewhere in the Estate the settle the mortgage, then these could, in theory, be used to pay this off. Whether this is possible will depend on whether this will result in other Beneficiaries not receiving their entitlement.
This option could be considered using the example of Mark and John. Mark and John are brothers and live in a property that is solely owned by Mark. Mark and John also have two sisters – Clare and Beth. Mark passes away and in his Will leaves everything equally between all three of his siblings. The property is mortgaged, but John wants to continue living there. As long as there were sufficient funds elsewhere in Mark's Estate to pay off the mortgage, any other liabilities and to ensure Clare and Beth received their entitlement then the property would not need to be sold and John could continue living there.
If there are not enough funds elsewhere to cover outstanding mortgage, other liabilities and Beth and Clare's inheritance then the property would need to be sold.
2. Is there more than one owner (and if so, how is the property owned)?
This is also a major factor in considering how a mortgaged property will be dealt with, as the surviving owner will also have a say in how the property is treated.
A simple scenario is if a husband and wife own a property as Joint Tenants. If the property is owned in this way and has a joint mortgage, then ownership would pass into the surviving spouse's name as well as the mortgage. As long as the wife could continue to pay the mortgage she could continue to live there.
The situation is slightly more complicated if the property is held as Tenants in Common. In practical terms the property would not automatically pass to the wife on the husband's death. Instead the husband's share of the property would form part of the husband's Estate and would be dealt with as per the terms of his Will or, if there is no Will, then by the Rules of Intestacy.
If the property was held in Tenants in Common and there was a mortgage, then matters become complicated further. It is not a simple case of removing the deceased spouse's name from the mortgage and transferring ownership. Usually in this scenario the mortgage company would need to agree to the surviving owner continuing living in the property and paying the mortgage.
Updating the Mortgage Provider
In all circumstances where the owner of a mortgaged property passes away, it is important that the mortgage company is notified straight away. By keeping them up to date, it is less likely that they will issue court proceeds forcing a sale on the property so that they can recoup their debt. This would only result in further costs and deplete the value of the Estate.
If you are responsible for administering an Estate which includes a mortgaged property and you aren't completely clear on what you should do, then it's important that you seek specialist legal advice. At Co-op Legal Services, our Probate specialists can provide advice and guidance on what the options are.