What happens to my loan if I die?

I've been working on some rough ideas for my Will before I go see my lawyer, and I had always assumed that I would have my beneficiaries continue on with my loans (should they choose to, they could always sell), but it dawned on me it might not be that simple. Can someone tell me what happens in the following scenarios (assuming I have the correct structure, Tenants in Common vs. Joint Tenancy):

1) A property that I co-own, but with joint loans against it - I assume this is the easiest...my co-owners would simply take on the debt

2) A property that I co-own, but with separate loans against it - yikes, how does this work?

3) Properties I own outright, with loans only in my name - even worse than #2 right?

It would be a shame if the beneficiary was more than happy and capable of taking on the loan but was forced to sell a really good property because they didn't meet serviceability requirements (e.g. retired or in between jobs). What are my options and what should I do to prepare myself?

 

Simple....don't die!

pinkboy

 

When you die the property will change ownership and the debt must be repaid or loans renegotiate.

You have to be very careful with loans secured by a property but used for something else. Under the Conveyancing Act loans secured by a property must be paid out of that property, unless otherwise specified in the will. So without careful planning Child A could end up missing out while child B gets more than expected.

 

Does this basically mean the beneficiary would have to apply for a new loan, as if they were buying the house off the market? Will they have a grace period where in the mean time they could continue paying down the existing loan? (they may need a few months to get their affairs in order before they can even apply, it's a lot to ask someone to take on a big debt out of the blue)

 

e.g. You have a $800,000 valued house with a $400,000 loan attached.

In the will you say "I give juniorbean my house". No mention of the loan. Junior will get the house 'with' the loan. The bank must still be paid back. Junior can sell the house, pay the loan and be left with $400,000, or he could borrow $400,000 and pay out your loan so he gets the house in full.

Yes banks will let the loan stay open for ages as long as the repayments are met (seek advice before paying yourself). I've seen some stay open for about a year or more.

 

And don't forget banks will freeze accounts of the deceased when they learn about the death. Executors will need to open new bank accounts.

 

lol juniorbean

Ok that's great to hear. If the beneficiary had to immediately apply for the new loan, I could see plenty of forced sales.

 

If you intend to have any beneficiaries who are under 18, it might be worth setting up a Testamentary Discretionary Trust. The main benefits are (1) better asset protection and (2) full tax free thresholds for any beneficiaries under 18. Ask your lawyer about it.

 

Even if you have beneficairies over 18 it is still well worthwhile. see
Legal Tip 9: What is a Testamentary Discretionary Trust?
Legal Tip 23: Why Set up a testamentary trust