Will Says "Pay My Debts": Who Carries the Mortgage on a Gifted House in Ontario?

A parent dies and the will leaves the house to one child and the rest of the estate to others. The will also says the executor should pay all of the deceased's just debts. The house has a mortgage. Does the rest of the estate pay it off, or does the child who gets the house inherit the debt along with the home?

This article explains how Ontario law reads the will on that question. It is about who bears the mortgage as between the people who inherit, not about what a lender will do. Wording matters a great deal, so the details of your own will are worth reviewing with a lawyer.

The starting rule: the house carries its own mortgage

When a person dies owning land that is mortgaged, 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. This comes from s. 32(1) of the Succession Law Reform Act.

In plain terms, a gift of the house is generally a gift of the house as it stands, debt included. The other beneficiaries do not automatically have to fund the payout of that mortgage from their shares.

What a general "pay my just debts" clause does

Many wills include a standard line directing the executor to pay the deceased's debts. Under s. 32(2), a general direction in the will to pay debts out of the estate is not enough by itself to shift the mortgage off the home. The person who made the will must signify that intention expressly or by necessary implication.

So a boilerplate clause usually will not do the job. A will that clearly says, for example, that the house is to pass free of the mortgage and that the mortgage is to be paid from the residue would be much more likely to meet that test. Whether particular words are clear enough is a question of interpretation, and it is a common source of disagreement.

How this fits with the other debts

Other debts are handled differently. Under s. 5 of the Estates Administration Act, the residuary estate, made up of real and personal property, pays the deceased's debts rateably according to value. That is subject to a contrary intention in the will and to s. 32 of the Succession Law Reform Act.

Put together, the two rules work like this:

• The mortgage on the gifted house stays with the house, unless the will clearly says otherwise.
• Other debts are generally paid from the residue, subject to the will and to the mortgage rule.
• A general debts clause does not turn the mortgage into a residue debt on its own.

Raising money against the house

Sometimes a will charges land with debts or legacies and leaves it to someone without saying how the money is to be raised. In that case, under s. 44(1) of the Trustee Act, the person who receives the land may raise the money by selling or mortgaging that land.

Where the home is to be sold, remember that only an estate trustee has legal authority to manage or distribute the estate, including selling the home. A beneficiary should not list or sell the house before the estate trustee is in place.

A note on tax: for Estate Administration Tax, Ontario real estate is valued less encumbrances on it, such as a mortgage, collateral mortgage or lien. Other debts such as lines of credit, credit cards and loans cannot be deducted. That tax rule is separate from the question of who ultimately bears the mortgage between beneficiaries.

What to do if you disagree about who pays

Executors and beneficiaries often read the same will differently. These steps can help keep things orderly:

• Get a copy of the will and read the gift of the house and any debts clause together.
• Collect the current mortgage statement and a list of all other debts.
• Check whether the will or any other document says anything about the mortgage, beyond a general debts clause.
• Ask the estate trustee not to distribute the residue until the question is settled. An estate trustee who distributes wrongly can face personal exposure, though a court may relieve one who acted honestly and reasonably.
• Speak to a lawyer about the wording before anyone pays off the mortgage or signs a document that accepts a position.
• Keep written records of what each person agrees to.

This article does not address what a lender may do or any mortgage insurance, because those depend on the lender and the policy. The statute text can also change, so a lawyer should confirm the current wording of the sections on e-Laws.

Frequently asked questions