Does a Mortgage Have to Be Paid Off When the Owner Dies in Ontario?

If you have inherited a home, or expect to, a mortgage on it can be a worry. Heirs often ask whether the whole balance is due right away and whether they must pay it from their own pocket.

Ontario law answers part of this question, mainly who bears the mortgage between the people who inherit. What the lender itself can do depends on the mortgage terms and the lender's practices, so read the mortgage documents and ask a lawyer to confirm.

What the lender can do

Lender practice after a borrower dies, including any creditor insurance on the mortgage, varies from lender to lender. Whether you can keep making payments, must refinance, or must sell depends on the mortgage contract and the lender's response.

For that reason, the estate trustee should contact the lender early, ask what it requires in writing, and keep the account in good standing while the estate is sorted out.

Who bears the mortgage as between heirs

When a person dies owning mortgaged land, the land itself is primarily liable for the mortgage debt as between the people claiming through the deceased. The beneficiary who receives the home takes it subject to the mortgage unless the will or another document shows a contrary intention.

A will that simply says debts should be paid out of the estate does not usually change that. A general direction to pay debts is not enough by itself to shift the mortgage off the home. The person making the will must signify that intention expressly or by necessary implication.

Other debts are handled differently. The residuary estate, real and personal, pays the deceased's debts rateably according to value, subject to a contrary intention in the will and to s. 32 of the Succession Law Reform Act.

Where a will charges land with debts or legacies and leaves it to someone without saying how they are to be raised, the person who receives the land may raise the money by selling or mortgaging it.

Your options with an inherited mortgaged home

• Keep the home and keep paying, if the lender allows it.
• Refinance in your own name to pay out the existing mortgage.
• Ask the estate trustee whether the home should be sold to deal with the mortgage, since only the estate trustee has authority to sell it.
• Ask the estate trustee about other ways to raise the money, as the will may address this.

The home and its contents vest in the personal representative, who holds them as trustee. Only an estate trustee has legal authority to manage or distribute an estate, including selling the home.

If a sale is made only for the purpose of distribution, it is not valid without the required concurrence, which generally means a majority of the beneficiaries holding at least half the interests. Where a minor has an interest, written approval of the Children's Lawyer or a judge's order is needed.

Real property not disposed of within three years after death vests in the beneficiaries, unless the personal representative has registered a caution, which holds off vesting for another three years.

Costs, tax and insurance while the mortgage is open

For Estate Administration Tax, Ontario real estate is valued less encumbrances such as a mortgage or lien. Lines of credit, credit cards, loans, funeral expenses and lawyer's fees cannot be deducted. Above $50,000 in estate value, the tax is $15 for every $1,000 or part of $1,000.

For income tax, a person is treated as having sold all their property just before death, which can create a capital gain or loss on the home. Where the home goes to someone other than a spouse or common-law partner, it is reported on Schedule 3, and all or part of the gain may be exempt as a principal residence designated on Form T1255.

Before distributing sale proceeds, consider a CRA clearance certificate. A legal representative who distributes assets without one can be personally liable for unpaid tax, up to the value of the assets distributed.

Insurance on the home is worth checking early. A house left vacant after a death can be a change material to the risk, and the insurer must be promptly notified in writing or the contract may be void as to the part affected. Read your policy wording.

What to do next

• Gather the mortgage statement, the will and the title record.
• Confirm who the estate trustee is, since only they can sell or distribute the home.
• Contact the lender in writing and ask what it requires.
• Read the will for any clear direction about the mortgage.
• Notify the home insurer in writing if the house is empty.
• Get legal advice before selling, refinancing or distributing any proceeds.

Frequently asked questions