What happens when your home loan outlives you

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When a person takes on a mortgage, they usually fully expect to pay it off before they die although this is not always the case. (Rawpixel pic)

Who has not wondered whether their estate can cover the cost of their debts after they die? An estate refers to the money, possessions and property of a deceased person.

Usually, when people sign a loan agreement, they assume the best and expect to live until the loan is fully paid off. Debt becomes the responsibility of their estate after someone dies.

The process of paying bills and distributing what is left is called probate. Hence, people buy life insurance not only to leave something behind for their loved ones but also to help deal with any debt and final expenses.

Loanstreet.com.my co-founder Jared Lim tells Property Advisor that once the bank has been notified of a borrower’s death, how it is handled will depend on a few factors.

“First, whether or not there is mortgage insurance. If there is, the banks will recoup whatever they can from the insurer as a first resort.

“If it is sufficient, the mortgage will be paid off and the house can be released back to the estate or the responsibility of paying off the debt then falls to the co-borrower.”

However, if there is no co-borrower, Lim said any joint name owners of the house and/or those who stand to inherit the house would be given the option to take over the loan and the asset.

“At this point, a refinancing/restructuring can be discussed with the bank. If there is no one to take over the loan, the bank will have to make a claim against the estate for settlement of the outstanding amount.

“This could result in the house being sold off by the bank. Any remaining proceeds after the loan have been paid off will be returned to the estate,” Lim said.

He emphasised that the debt only becomes a bad debt if the loan still cannot be settled after all these steps are taken.

“But in no case are the heirs or co-owners ever liable to settle the debt unless they were already co-borrowers, or signed on with the bank to take on responsibility for the rest of the loan.”

Messrs Eunice Tan & Partners founder Eunice Tan Mui Lee said when the borrower dies, the repayment for the housing loan will not automatically become a bad debt.

“If the mortgage reducing term assurance covers the housing loan, the bank will enforce the terms of MRTA and make full repayment of the remaining balance.

“If this is not applicable, the next of kin or the administrator of the estate may continue to make payment. The administrator may redeem or continue to make repayment of the housing loan from the estate,” said Tan.

She said it would become a bad debt if there is no repayment of the housing loan by the estate of the deceased (also the borrower). “If it becomes a bad debt, the bank will foreclose the property.”

What can the next of kin do to guard against unfavourable events?

Loanstreet’s Lim said without a will, settlement of the deceased’s estate will follow the intestacy laws of the state.

“The biggest issue with not leaving a will is that the process for distribution of the estate is less straightforward and would take a lot more time, oftentimes taking more than a year to conclude. This delay can cause a lot of trouble for the survivors.

“Comparatively, with a will, the estate can be settled and distributed in four to six months. During this period, it is recommended that the survivors continue to pay the mortgage instalments to prevent late fees and penalties.”

Tan said there is no major implication if a person does not leave a will. “If there is no will, the next of kin may apply for a Grant of Letter of Administration in court to protect and to administer the property.”

What are the legal steps to be taken if this happens?

IPP Wealth Planners Sdn Bhd associate Sam Lim said the family members/next of kin must appoint an administrator whose duty is to apply for the Letter of Administration (LA) from the court.

He said the administrator can be a family member or parties who have vested interest in the estate.

“The administrator will then need to find two sureties with assets equivalent to the estate. Once the LA is issued, the court will grant the estate distribution according to the Distribution Act 1958.”

Tan said if there is no will, the next of kin or the beneficiary of the estate may file an originating summons in court for an order to appoint the said person as the administrator of the estate.

“The court will determine whether there is any objection from the beneficiaries to appoint the applicant as an administrator. If there is no objection, the court will grant the order appointing the applicant as the administrator of the property.

“Once the order is made, the administrator must forward a copy of the court order to the bank as a record and continue to make repayment of the loan or otherwise to redeem the property from the bank.”

This article was written by Adlene Hanna of PropertyAdvisor.my, Malaysia’s most comprehensive source of property data, property analytics and insights.