What happens to your mortgage if you die without a will?

For most Australians, a home is their biggest asset. It's also usually their biggest debt: the mortgage. It's natural to wonder what happens to that loan when you pass away.

A common myth is that the loan just disappears, but that is not the case. If you die without a will, the situation can become complicated. Your loved ones must navigate a complex legal process during a difficult time.

This guide will break down what happens to a mortgage when someone dies without a will in Australia. We’ll look at who has to pay the debt, what choices the family has, and how planning can prevent future difficulties.

Initial steps after a homeowner's death

The mortgage debt does not vanish. The bank is still owed its money and will expect the repayments to continue.

Responsibility for the debt falls on the deceased person's estate. An estate is everything you own (your house, car, savings) and everything you owe (the mortgage, credit card bills). Initially, the estate itself, not a specific person, owes the money.

A couple of things need to happen quickly:

• Let the lender know: The bank needs to be notified of the death as soon as possible. This is usually done by the executor (if there's a will) or a family member managing affairs. A quick phone call can stop the loan from going into default and prevent the bank from starting foreclosure. Most lenders have teams that specialise in this situation.
• Keep paying the mortgage: The payments cannot stop. While the family figures out the long-term plan for the house, funds from the estate should be used to keep the loan up to date.

When you die without a proper will, it's known as dying "intestate." This means you do not have a say in who gets your property or who looks after your affairs. Instead, a set of state laws decides everything.

The legal process without a will

When there's no will, the law steps in with a default plan for your assets. These are the "rules of intestacy," and they vary slightly between Australian states and territories. They follow a strict family tree to determine who gets what.

Because there's no will naming an executor, a family member (usually the next of kin) has to go to the Supreme Court and apply for a "Grant of Letters of Administration." This is a legal document that officially appoints someone as the "administrator" to handle the estate. The process can be slow, expensive, and cause significant delays. Your family is essentially waiting for the court's permission before they can do anything.

The law then uses a fixed formula to hand out your property, usually prioritising a spouse, then children, then parents, and so on. This can create unintended results, especially for blended families or if you have children from a previous relationship.

For example, depending on your state and the value of your estate, your spouse might only inherit a set amount (like the first $486,870 in Victoria) plus half of the remainder. Your children would get the other half. This could force the sale of the family home just to split the assets according to the rules. It can also result in the house being co-owned by several people who might not agree on what to do with it.

Options for the heirs

Your heirs get some time to make decisions. In Australia, lenders cannot demand the entire loan be paid back immediately because the owner died. The administrator can talk to the lender, giving the beneficiaries time to make a decision.

The legal heirs generally have three main paths they can take with the mortgaged property.

1. Take over the mortgage

• What it is: The heir steps into your shoes, taking over responsibility for the existing mortgage and continuing the monthly payments.
• How it works: They’ll need to let the lender know and show proof that they’ve inherited the property. While they might not have to go through a full loan application, the lender will still want to see that they can afford to service the loan.
• Best for: Heirs who want to keep the home, either to live in or as an investment, and can comfortably afford the current payments.

2. Refinance the mortgage

• What it is: The heir takes out a completely new loan in their own name to pay off the mortgage they inherited.
• How it works: This is like applying for any other home loan. The heir will need to qualify based on their own credit score and income. It's also a chance to lock in a lower interest rate or find loan terms that are a better fit for them.
• Best for: Heirs who want to keep the house but need a more affordable monthly payment or different loan features than the original one offered.

3. Sell the property

• What it is: The simplest option for some is to sell the house on the open market.
• How it works: The money from the sale is first used to pay off the remaining mortgage balance and any other estate debts. Whatever is left over is then distributed among the heirs according to the rules of intestacy.
• Best for: Heirs who either don't want the property, can't afford it, or when there are multiple heirs who need to split the value of the asset fairly.

If no one makes the payments and no decision is made, the lender will eventually foreclose on the property to recover their money. This is a difficult outcome, as the heirs lose the property and any equity that was built up in it.

The simple solution: Creating a will

A proper will is the single best tool for preventing the confusion, delays, and costs that come with dying intestate. It puts you in control.

Here’s how a will fixes the mortgage problem:

• You decide who gets the home: You can leave the property to someone you know wants it and can manage the responsibility, instead of letting a legal formula decide.
• You appoint an executor: You can name a trusted person as your executor. They can get to work right away managing your estate, speaking to the lender, and ensuring mortgage payments are covered without waiting for a court's approval. That speed is crucial for avoiding a loan default.
• You can leave clear instructions: You can even include specific instructions in your will or set aside funds from your estate to help your beneficiaries handle or pay off the mortgage, which can lift a weight off their shoulders.

Creating a will does not have to be a difficult process.

For a one-time fee of $159.99, every will from Willfully is checked by a qualified Australian lawyer. This gives you confidence that your wishes are documented correctly and legally enforceable. Your personal data is also kept safe with bank-level security.

A mortgage is a large debt, and it doesn't disappear when you die. If you pass away without a will in Australia, the fate of your home is left up to the courts and a set of state laws. This path is often slow, costly, and a source of stress for your family.

While your heirs have options, like taking over the loan, refinancing, or selling, making those decisions is much harder without the clear instructions a will provides.

For a clearer understanding, this video explains the key points of what happens to a mortgage when the borrower passes away.

The takeaway is simple: the best way to protect your property and your family from uncertainty is to have a proper will. It's a step that makes sure your wishes are followed and helps your loved ones through an already difficult time.

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Don't leave the fate of your home undecided. Protect your family and secure your legacy with a clear, legally binding plan. Create your Will online with Willfully.