A reverse mortgage can act as an important source of income for Australians of retirement age. People can usually continue living in their home without having to make repayments on the money that has been borrowed against the equity held within that same property asset. Even if the loan is only for a percentage of the home’s value, the property is still used as a security for the loan. This means that the loan will need to be repaid once the homeowner dies and is no longer living there.
What happens to a reverse mortgage after the borrower dies?
During the life of the loan, the interest on the reverse mortgage is being capitalised and there are often other additional fees. Since it is unlikely that the borrower would be making substantial repayments over this period, the overall amount payable is likely to have grown to a greater amount than originally borrowed. This is because there is now interest payable on the reverse mortgage along with the principal or loan amount.
The amount loaned becomes payable upon the borrower’s death, and so it will be left in the hands of their beneficiaries to sort out how the debt is repaid. The proceeds from the sale of the reverse-mortgaged home itself, as well as all the assets that form part of an estate, might be used up to pay the reverse mortgage. Unless any arrangements have been made through a Will or estate planning, anyone who had been living with the deceased in the property at the time of death may also need to vacate the house before it is sold to repay the debt. The lender can ultimately repossess and sell the home if the loan is not repaid.
What do you do if you inherit a reverse mortgage?
If you are named as a beneficiary in your loved one’s Will, you may stand to inherit a home that has a reverse mortgage on it. This generally means the responsibility for making sure the mortgage is paid off will fall to you, and after this is done, there may be fewer assets left to be inherited.
Dealing with a reverse mortgage when the homeowner dies can add pain to the grief for those left behind, not to mention that stress that comes with essentially inheriting a debt. Considering this, the homeowner should ideally appoint an executor for their estate who can table responsibility for dealing with any debts. This saves any beneficiaries the burden of dealing with reverse mortgage lenders while they are grieving.
The executor would be able to discern whether selling the home is necessary or if there are enough funds available within the estate to repay the outstanding mortgage. For instance, if the deceased had an existing life insurance policy, the payout due might settle the debt. Depending on who the property was left to (spouse, child or another family member), the executor would also determine whether they can assume legal responsibility for the reverse mortgage.
The importance of having a Will
If you die without leaving any Will or other arrangements for settling your debts, your beneficiaries may not be able to take over any outstanding loans. They would need to speak with the lender to discuss the terms of the reverse mortgage, before deciding on a suitable course of action. For example, some reverse mortgages include an agreement that allows surviving family members to continue living in the property as long as they can repay the loan completely. However, this option may only be available to people who are not potential beneficiaries, and thus not obligated to repay the loan.
It’s clear that passing wealth to your loved ones is often complex, and if not managed well, may lead to costly mistakes. If your situation is complex, it’s often a good idea to seek personalised advice. Detailing your wishes in your legal Will is one step in ensuring your assets are protected and distributed as you’d like them to be.
Disclaimer: The content of this blog is intended to provide a general guide to the subject matter. This blog should not be relied upon as legal, financial, accounting or tax advice.