The children usually ask before the parents do. Will Mum lose the house? Will we be left with the debt? Will there be anything left?
No, no, and usually yes. The longer answers are below, and they are worth reading together as a family before anyone signs anything.
The Loan Is Repaid From The Sale, And The Rest Goes To Your Estate
When the last borrower dies or moves into long-term care, the loan becomes repayable. The executor or the family sells the home, the lender is paid the balance plus all accumulated interest from the proceeds, and everything left over passes into the estate to be distributed under the will.
The house is treated exactly as it would have been without the loan, except that one creditor is paid first. If the will leaves the estate equally to three children, each gets a third of what remains after the lender.
The 12 Month Window Your Family Gets
Heartland allows up to twelve months from when you leave the property for the loan to be repaid. Interest continues to accrue during that time, but the family is not forced into a quick sale. Twelve months is enough to tidy the house, wait out a slow season and sell properly.
SBS has its own timeframe under its loan terms; ask for it when comparing. In both cases, the executor should contact the lender early, because the lender will want to know the plan.
Can The Children Keep The House?
Yes, if they can repay the loan from other money. The lender does not insist on a sale; it insists on repayment.
In practice this happens less often than families assume. By the time a loan has run ten or fifteen years the balance is often $200,000 to $400,000, and a child who wants to keep the family home needs to refinance that into their own mortgage on top of whatever they already owe. Where there are several children, the one keeping the house also has to buy out the others’ shares of the remaining equity.
It is far easier where the loan was small and short. A $40,000 reserve drawn once for a roof, with a balance of $70,000 at the end, is within reach of many families.
Protecting A Share Of Equity For Your Family
Equity protection is the feature designed for this question. Both lenders allow you to ring-fence a percentage of the home’s eventual net sale proceeds, up to 50 percent at Heartland, for a one-off $55 fee. When the loan is repaid, your estate receives at least that share under the lender’s guarantee, whatever the balance has done.
The cost is a lower borrowing limit by the same percentage. A 72-year-old protecting 20 percent on a $950,000 home has a Heartland limit of about $243,000 instead of $304,000.
For a parent who wants to borrow a modest amount and still promise the children something definite, it is the single most useful feature either lender offers.
Talking To Your Children Before You Decide
The loans that cause trouble are the ones nobody mentioned. A child who finds out at the funeral that the house carries a $300,000 debt feels deceived, even when the parent had every right to borrow. A child who sat in the meeting at the start, saw the projection and agreed that Mum should not go without a heat pump to preserve their inheritance is in a completely different position.
Both lenders recommend involving family, and SBS asks for it as part of the application. I ask clients to bring an adult child to the first conversation wherever possible, and most of the useful questions in those meetings come from the child.
A few things worth covering: how much is being borrowed and why; what the balance is likely to be in ten and fifteen years; whether equity protection is being used; and what each child’s expectations were. Sometimes the conversation ends with a child offering to lend the money instead, which is often the better outcome for everyone.
Putting The Plan In Writing
Update the will if the loan changes what you intend. If one child is to have the option to keep the house, say so and say how the others are to be treated. Tell the executor the loan exists and where the paperwork is. Keep the six-monthly statements where they can be found.
Your solicitor will cover much of this during the required legal advice. If you want the numbers side of it worked through first, with the equity protection option costed against your borrowing limit, that is part of what I prepare for every client. Book a chat.
