Death of a borrower with a mortgage in the UK

A mortgage is often a commitment lasting up to 30 years. Over such a long period, many unexpected situations can arise, one of which is the death of the borrower. Although banks restrict access to mortgages for the elderly, accidents do happen and not everyone will live to a ripe old age. To protect you at least a little against such an eventuality, in this article we will organise the facts about what happens to a mortgage after the death of the borrower in the UK.

What happens when a borrower dies?

Death, especially premature death, is not only a tragedy for family relationships – it is also a financial earthquake for your loved ones.

As a rule, under British law, upon the death of a borrower, both their property and their debt pass into the estate. The opening of the will, and thus the transfer of rights and obligations to the heirs, means that your children or partner will be responsible for paying the instalments on your home. For practical reasons, the person responsible for settling current liabilities and informing the bank of your death will be the executor of the will . You can appoint this person directly in your will, and if you do not do so, the court will decide after your death.

It should be clearly stated that in a situation where the deceased borrower was the only person responsible for repaying the mortgage, his family should not do anything without the knowledge of the executor of the will.

How are debts of a deceased person repaid in the United Kingdom?

As we have already mentioned, the executor of the will is obliged to inform the bank of your death. If it turns out that they are temporarily unable to settle your liabilities, the bank is obliged to propose a solution and reach an agreement with the authorised person.

If you have multiple liabilities at the time of your death, they will be paid off in a strictly defined order, known as the Priority Order. It is as follows:

• Coverage of funeral and estate administration costs;

• Repayment of secured debts (mortgage);

• Repayment of tax arrears and NIC contributions;

• Repayment of unsecured loans (credit cards, personal loans).

You can find more information on this topic on theMoneyhelper website.

What happens to a deceased person’s property?

During the inheritance process, in the second stage mentioned above, the heirs and the executor must decide on the future of the liability. As a rule, they have three options:

• Attempt to take over the mortgage;

• Repay the mortgage in a single payment;

• Sell the property.

If the heirs decide to take over the mortgage, they must designate one or more persons who would assume the obligation and inform the bank thereof. Their creditworthiness (affordability) is then assessed. If the bank agrees, a remortgage or transfer of equity is carried out and the mortgage is officially transferred to the selected persons. This process is quite similar to applying for a mortgage when buying a house.

If possible, a good and popular solution is to repay the mortgage in a single payment. This can be done using either your savings or funds from the estate. These may include the deceased’s savings or, for example, a benefit paid out from a life insurance policy. In this case, it is worth contacting the bank to find out whether an early repayment charge (ERC) will be imposed in such a situation. In practice, banks do not usually impose such a charge in these circumstances, but it is definitely worth checking.

The final solution is to sell the property and use the proceeds to repay the debt. However, as you can imagine, due to time pressure, this path carries the risk of selling the house below its value, which may even result in negative equity. However, if the capital has already been partially repaid, the surplus will be divided among the heirs.

What if I leave behind more debts than assets?

Unfortunately, it sometimes happens that the borrower dies when their assets are insufficient to cover all their liabilities. In such cases, the executor of the will no longer has freedom of action –** the parties agree on the person responsible for selling the property**. Lenders usually prefer the borrower’s family to carry out this process, as the sale price of the property is then generally higher.

In the event of a lack of cooperation on the part of the executor, the bank will carry out a repossession (seizure of the property) and sell the house at auction for a lower amount.

It is worth noting that in the event of an insolvent estate (i.e. a negative value of the inheritance), the bank bears the loss. British law stipulates that debts are not passed on to heirs.

What about inheritance tax?

When considering your property in the context of death, you must remember about inheritance tax. In order not to make this article too long, we will only mention the most important information:

• The basic tax-free allowance (Nil rate band) is £325,000;

• If the estate includes family property transferred to direct descendants (children, grandchildren), the tax-free allowance is extended by the Residence Nil rate band, i.e. an additional £175,000;

• The Inheritance Tax rate is 40% of the net value of the estate.

• Inheritance Tax is paid before the estate is distributed among the heirs.

A good way to avoid paying inheritance tax is toset up a trust. This is a completely legal method of tax optimisation.

How can you protect yourself financially?

A relatively large number of people decide to purchase life insurance for their mortgage. Although it is not mandatory, such insurance will effectively protect your loved ones in the event of your death. There are many insurance policies available on the market, and if you decide to use the services of a good broker, such as Extend Finance, a policy for an amount equal to the value of your mortgage will not be overly expensive. If you are under 40, the premium will probably be less than £50 per month.

Mortgage protection insurance, as this product is usually called, can take one of two forms:

• Decreasing term insurance – in this case, both the premiums and the benefit amount decrease over time, along with the outstanding capital. Such a policy can be tailored to the individual situation of the borrower. It is a relatively inexpensive solution that guarantees the repayment of the mortgage after death.

• Level term insurance - the sum insured and the amount of premiums in this policy are always the same. The later the insured person dies, the more money their family can receive.

In the vast majority of cases, the beneficiaries of such policies are the insured person’s heirs, although it is sometimes possible to set insurance terms whereby the policy is assigned to the bank and the money goes straight towards repaying the debt. In practice, this does not make much difference.