When talking about inheritance, some people may think about the money or land they can receive when someone important passes away. But not all types of inheritance are favorable because you can also inherit a person’s debt. Given our area of interest, we’re looking of course at inheriting someone’s mortgage.
If you’re interested in finding out how and when this can happen, and what you can do about it, read on.
Can You Inherit a Mortgage?
The first thing to know is that you typically don’t need to worry about inheriting a mortgage! If you’re a family member or beneficiary of a deceased person, you are not usually legally responsible for repaying his/her mortgage.
There is only one scenario in which you will inherit a deceased person’s mortgage obligations, and that is if you are a joint borrower on his or her home loan.
In Singapore, being a joint borrower means you’re also a joint mortgagor and joint owner, so you share the legal obligations for it, regardless of the arrangement you actually have with the main borrower, and whether or not you are actually contributing instalment money, or just your name, income and age for loan approval purposes.
So You Inherit the Mortgage. What’s Next?
If you’re a joint borrower of a home loan and the principal borrower dies, what happens next depends on what kind of loan it is, and whether it’s been covered by mortgage insurance. Mortgage insurance is insurance that kicks in to partially or completely cover a mortgage’s payments in precisely this kind of situation.
For HDB Loans
HDB loans require borrowers to take up the Home Protection Scheme (HPS), which is a kind of mortgage insurance. The HPS automatically applies if you’ve chosen to pay for your mortgage through your Central Provident Fund (CPF). With the HPS, if the property is owned by two people, when one or both mortgage borrowers pass away or become permanently disabled before age 65, the remaining mortgage will be paid by the CPF board. So basically, HPS would cover the mortgage you inherited if the first borrower dies, and you won’t have to worry about it anymore.
Otherwise, if you are not covered by HPS (e.g. you opted not to pay for the mortgage through your CPF, or are past the age limit), and you have not separately opted for a private mortgage insurance, then you, the surviving borrower, will have to take on the loan repayments in full.
For Bank Loans
Home loans from private banks can be covered by mortgage insurance called MRTA (mortgage reduced term assurance). If the mortgage in question has been covered, then you can reach out to your insurance provider to claim the lump sum in the event of your fellow borrower’s death. Just like HPS, MRTA pays for the borrower’s outstanding mortgage balance in the event of death or permanent disability. The only difference is, the MRTA applies with no age limit. Otherwise, you will have to take on the full responsibility for the loan.
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Taking on the Loan
If the deceased joint borrower did not buy mortgage insurance coverage, you will be required to take on the mortgage in full. To do that, the will’s executor would obtain a Grant of Probate authorising him to distribute the deceased’s assets, and bring it to the bank as evidence to inform them that you are the next person to assume the mortgage responsibility.
What If You Can’t Afford to Pay the Mortgage?
Just like the death of someone we know cannot (in most cases) be predicted, we can also be left scrambling financially if we didn’t plan, or don’t have the ability, to inherit a large debt. It’s only natural that some may feel lost and confused, or even desperate, as they ponder how to service this debt.
It’s important to know that there are many ways forward, and it’s not necessarily the end of the road if you cannot afford the home loan. Your first course of action should be of course to seek advice, unless you are well-versed with property finance.
Speaking to one of PropertyGuru Finance’s expert Home Finance Advisors can give you clarity as to your options, courses of action, and what might suit you best given your situation, and give you peace of mind as you save the time and effort having to find the answers yourself across the internet.
Here are some of the possible outcomes or decisions you can make, if you can’t afford to pay for the remaining mortgage:
1. The bank forecloses on the property.
The ultimate consequence of not being able to pay for a mortgage, if no other action is taken, is that the bank will foreclose on the property, and auction it to recover money.
Before the foreclosure happens, the bank usually issues the surviving borrower a letter of warning when he/she misses a monthly repayment as a reminder to pay for the mortgage. If you still cannot pay, you may receive more warnings from the bank and/or its lawyers before the matter escalates. The process may differ on a case-by-case basis and between banks.
2. You can try to sell property.
If you don’t have the budget to pay for the mortgage in the long-term, and you don’t want all your previous repayments to put into waste, and if you don’t particularly want or need to hold on to the property, then finding a buyer for it on the open market could be your next best move.
However, selling your property takes time, and in the intervening months, you either need to continue paying for the instalments, or negotiate with the bank or HDB about deferment or reducing the payments temporarily to buy time, subject to their approval. Nevertheless, this is the course of action to take if you never wanted this financial hot potato in the first place, and want it gone for good.
3. Refinance to a more favourable mortgage to continue holding on.
Meanwhile, if, you can still handle paying the monthly instalments, or if you actually want to hold on to the property (e.g. because of sentimental value, or because it’s of a size you can’t usually find), or if you simply want to be able to pay for a lower mortgage while you’re still looking for a buyer of your property, you can find a better mortgage deal through refinancing.
Refinancing means switching your mortgage to a different bank with more favourable or attractive terms, whether it’s tenure length, interest rate structure, total costs, or repayment schedule. This could help make the mortgage more supportable by your finances over the remaining loan period. However, and especially if you’re planning to just refinance to buy time for a few months or a year, you need to ensure that the costs of refinancing do not outweigh your savings.
4. Bring on another joint borrower.
Last but not least, you may invite someone you trust to be a new joint borrower to help you pay for the mortgage and shoulder part of the burden. However, do note that adding a joint borrower to an existing mortgage will also generally require a refinancing and recalculation of mortgage offer based on your combined financial ability and credit ratings, and you can’t just add a name and halve your existing mortgage just like that.
At the same time, inviting someone to be a joint borrower will also mean you have to jump through the necessary hoops to make them a joint owner of the property. It requires part of the property to be sold to this new person.
And quite aside from the administrative work and costs that might incur, you have to be sure the person you get is someone you’re comfortable with and trust as a co-owner, since he/she will then have as much legal authority to do as he/she pleases with the property as you!
Lastly, the person who comes onboard as a joint borrower is also subject to many eligibility criteria, as well as obligations – not least of which will be that if you die, he/she will now inherit the mortgage just as you did previously.
Be sure to inform the person about the prerequisites of being a joint borrower, including being a guarantor, getting his/her total debt servicing ratio (TDSR) and credit score involved, and sharing legal rights and responsibilities in the property as a co-owner, to ensure you are being fair both to the person and to yourself.
At the end of the day…
You just really have to know what works best for you, considering your financial status, needs and other goals. Losing a loved one is tough, and we want to support you in finding ways to make the mortgage work. We recommend taking some time to reach out to our Home Finance Advisors to assess your current situation and seek professional advice.
This could also be an opportune time for a reminder that getting a mortgage is a huge financial responsibility. It is best to save up while you’re still alive and healthy to reduce the potential impact of your debt to your family or loved ones in case of death.
For more home financing guides, read here.
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