Who pays for a Mortgage when you’re no longer around?

17th May 2019

 

Recovering from the death of a loved one is already a difficult enough process, but having to sort out any remaining debt, like the mortgage makes things even more complicated. As a Contractor, it’s like you’re the main breadwinner in the household so it’s important to make sure your family are financially protected and can ensure a roof over their head if you pass away. This can be done by having Life Insurance in place.

 

Who do the debts fall to?

If you pass away, your mortgage debt doesn’t disappear. The responsibilities will fall to the executor. The ‘executor’ is someone you’ve named in your will to handle the proceedings following your death. You can name multiple executors but it is common to choose your partner, oldest child or sibling.

 

What do the lender’s require?

Evidenced in your contract, your mortgage lender is legally allowed to demand the full sum of the mortgage to be repaid, even after the passing of the mortgage holder. They also hold the right to force the sale of a property to reclaim any outstanding balance. Though most lenders will be sympathetic and understand that the legal process is complex and lengthy.

If your partner or other beneficiaries are looking to keep the property in their name, they will need to run through a standard mortgage assessment to confirm that they can afford to take over the mortgage payment. If the lender does not approve the new mortgage application then the property may need to be sold to pay off the debt, assuming no other insurance or savings are available.

 

What if it is a joint mortgage?

When you and your partner take out a joint mortgage, you are ‘jointly’ liable for keeping up with the mortgage repayments.

Following your passing, the home will not automatically transfer to your partner, regardless of what is said in the will. To transfer the mortgage and bring the property into their own name, your partner will need to apply for (and be able to afford) the property in their own name. As mentioned before, if they are not able to afford the mortgage on their own name, they may have to sell the property to pay off the remaining debt.

However, you can help your family even after your passing by having Life insurance in place. Life insurance is designed to help protect against the financial impact death may have on your family or loved ones. It pays out a tax-free lump sum if you pass away or are diagnosed with a terminal illness (if the life expectancy is less than 12 months) while covered by the policy. This money can help your family pay off all or most of the mortgage, depending on the amount of cover you took out.

If you own a limited company as a Contractor, you can also benefit from tax efficiencies by paying for your Life Insurance policy as a business expense. This is known as Relevant Life Insurance. Relevant Life Insurance not only helps your family skip the long probate period (as Relevant Life Insurance policies are most often written into trust) but will help reduce your corporation tax bill. More than this, a Relevant Life Insurance policy is not seen as a benefit in kind so will not need to be included in the P11D, and your pension pot will be untouched as it doesn’t count toward your lifetime pension allowance. More information about Relevant Life Insurance can be found here.

 


 

No one knows what the future has in store, which is why it’s important to be protected now. If you’re looking to protect your mortgage debt, get in touch with our expert protection advisers.

All content is accurate at the time of publication

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