What happens to your debt when you die

It’s never nice to think about a time when you’re not going to be around, but much like the need to consider life insurance so your family are financially protected in the event of your death, it’s important to consider what will happen to your debt as well. Here, we take a closer look at what will happen to outstanding mortgage and lifetime mortgage (a type of equity release) debt and any loans, credit cards and similar unsecured credit agreements you have, and how you can prepare accordingly.

When you die, your estate will be used to repay any debts you leave behind. Depending on how much debt you have and the value of your estate, this means that there may not be much left over in the way of inheritance, so it’s important to factor this into any financial planning scenarios and consider if you may need a larger life insurance policy to ensure you’re leaving something behind.

It’s important to point out that any individual debts – debts that are solely in your name – won’t be passed on to your family. This means that if there isn’t enough money in your estate to cover them, they’ll be written off. However, this doesn’t apply to mortgages that are in joint names, or in cases where someone is acting as a guarantor for you, in which case they may be responsible for repaying any outstanding debt.

Your mortgage is likely the largest form of debt you have, so it’s natural to want to make sure that your family isn’t left to cover the cost, particularly if you’re the breadwinner. Here, your family won’t ‘inherit’ the mortgage; rather, the mortgage will have ideally been paid off via the proceeds from your estate and/or through any life insurance or your repayments met at least in the short term by mortgage payment protection policies you have in place.

If there isn’t enough money to cover the mortgage, your partner may be able to take out a mortgage in their sole name – note that even if you have a joint mortgage, it can’t simply be transferred to your partner – but they’ll need to undergo a full affordability assessment. This may mean they won’t qualify for the required amount, and in this case, there’s the chance that the home will need to be sold to repay the debt, highlighting why you need life insurance when taking out a mortgage.

However, things can get a little complicated depending on who’s named on the mortgage and whether you’re ‘joint tenants’ or ‘tenants in common’. This is just one of the reasons that it’s important to seek suitable financial advice before the time comes, so all parties can know what to expect. You can get a free one hour consultation from our preferred financial planning advice firm Kellands Hale (subject to min investments of £100,000) or search on Unbiased.co.uk to compare advisers near you. 

If the lifetime mortgage is in your sole name, then your property will be sold, and the income used to pay off your lifetime mortgage debt. If the lifetime mortgage was taken with another person that is still alive then it will continue until either they die or go into long term care.  When a property is sold to repay a lifetime mortgage any remaining funds will go to the estate.  Lifetime mortgage lenders that are members of the Equity Release Council will also guarantee that the amount to be repaid will never exceed the value of the property. This means your beneficiaries will avoid negative equity. Find out more about how equity release and lifetime mortgages work.

Credit cards, loans and similar credit agreements count as examples of individual debt, so any unpaid balances will always need to be paid out of your estate. If there aren’t sufficient assets to cover them, they’ll be written off – though as mentioned, the exception to this is if they’re in a joint name or someone has acted as a guarantor.

If you leave behind more debts than your estate is worth, it becomes known as an ‘insolvent estate’. In this case, any remaining debts need to be paid in order of priority, starting with the mortgage (and any other secured debts), then any ‘priority’ debts such as income tax or council tax, and finally unsecured debts that include credit cards and utility bills.

What happens next depends on whether the debts were in a single or joint name, and whether there are any insurance policies in place. As discussed, it’s likely that any unsecured debts will be written off, while your family may still need to cover the mortgage debt in some way, even if it means selling the property to repay it. Again, this makes seeking advice essential, as well as ensuring you’ve got suitable protection policies in place – read more about the importance of financial advice and how to get it so you can be confident your family will be financially secure after you’ve gone.