29/06/2017

You've inherited a property, but is the inherited property liable to repay the remaining mortgage debt?

Your debts don’t die with you.  They survive you and have to be paid from your estate.  In the recent case of Winn v Harding, the New South Wales Supreme Court was asked to assess whether the gifted property or the rest of the estate were liable to bear the remaining mortgage debt.

The Case

Maureen was the executor and a beneficiary under the Will of the late Karen Winn. She inherited a property in Bathurst which, at the time of Karen’s passing, had a mortgage to Bankwest.

The will of Karen directed that the outstanding mortgage debt on the property be paid out of the residue of her estate.

The main issue considered by the court was whether the property was liable for payment of the remaining mortgage.

So, who usually pays?

The default position in NSW is that where someone does not include a ‘contrary intention’ in their Will, the mortgaged property will be liable for the payment of the mortgage. This general rule is contained in Section 145 of the Conveyancing Act 1919 (NSW).

The effect of this section is that money from the general pool of assets contained within someone’s estate will not automatically assist to pay out a mortgaged property upon their death.

This notion is based on an old English legal principal and is mirrored in almost all Australian states.

Contrary intention

In this instance, Karen had included a specific intention in her Will that payment of the mortgage debt would be from her residual estate (meaning everything that Karen owned, excluding her property that was expressly gifted under the Will).

The court held that the Will had in fact provided a contrary intention for the purposes of Section 145 of the Conveyancing Act. This was on the basis that Karen’s Will included an express direction that referred to the property address and the money from which the mortgage debt was to be paid.

Lack of Funds

As it turned out, Karen’s residual estate at her death did not hold enough funds to cover the payment of the remaining mortgage debt.

In light of this, the courts decided that the property was liable for payment of the remaining mortgage debt, essentially reverting back to the default position. Accordingly, Maureen may not have inherited the property itself, unless she was in a financial position to help pay out the remainder of the mortgage to Bankwest.

If you own a property that is currently mortgaged, are concerned about the burden of debts in relation to your estate, or would simply like to have your Will updated, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.