Legal Tip 252: Security Guarantees and Death

What happens if a parent has let an adult child use their home as security for the child’s loan and then mum dies?

The guarantee would have involved mum mortgaging her property to the bank. The mortgage won’t go away with the death. It will still be in force and the mum’s estate won’t be able to be wound up until the mortgage is removed from her property. A bank will only release the mortgage if there is other security suitable for the loan. (keep in mind that a loan is not a mortgage and a mortgage is not a loan).

If the child defaults on the loan the mum’s property can still be taken by the bank to satisfy the debt and this could mean other beneficiaries of the estate of mum miss out.


Example

Marge has died and Homer is the sole surviving parent of Bart, Lisa and Maggie. Bart has a great idea to buy a property in a mining town for $800,000 as it is getting $1500 pw rent. The only trouble is that Bart has no assets at all. He asks Homer to let him use the family home as security and Homer agrees guaranteeing the loan by providing a mortgage over his property – the bank is taking a mortgage over Barts $800,000 property plus Homer’s $500,000 home, which was unencumbered.


Pretty soon the value of Bart’s property is $400,000 and rents are $200 pw. Bart can’t cope and is stressed out as is Homer. Homer has a heart attack and dies.

Bart is struggling to keep up the payments. Homer’s executor encourages Bart to refinance – but there is absolutely no hope as the property is worth $400,000 but the loan is $850,000. More than 200% LVR.


In no time at all Bart throws his hands up and gives in when his tenant leaves. The bank takes Bart’s property and sells it for $400,000. It then takes possession over Homer’s property and sells that for $500,000 – giving up the change from what it is owed - $195.23 after interest and legal fees.

Homer’s will can be finalised at last.

Homer wanted his children to get equal shares of his estate so the 3 kids get 1/3 of the estate, or about $64 each.

Lisa and Maggie are ****** off at Bart to say the least.

 

Nothing new there