Death of the Borrower: What Happens to the Mortgage?
The death of a loved one is always a difficult time, and financial concerns related to the mortgage add an additional burden. In Quebec, the legal framework is clear but complex: the mortgage survives the death, and the heirs or estate must make quick decisions to protect the real estate asset. Understanding the mechanisms at play, available protections, and financial options can reduce stress and avoid costly mistakes.
The Mortgage After Death: The Legal Framework in Quebec
Under the Civil Code of Quebec (CCQ), a mortgage is an accessory real right that encumbers an immovable (art. 2660 CCQ). It is not extinguished by the borrower's death. The mortgage debt becomes an obligation of the estate (art. 776 and following CCQ). The estate liquidator, designated by will or appointed by the heirs, is responsible for managing the estate's assets and debts, including the mortgage. Mortgage payments must continue to be made during the estate settlement process to avoid default.
Mortgage Loan Insurance: The First Protection
Mortgage loan insurance (often sold by the bank at loan signing) generally covers death, disability, and sometimes job loss. Upon the insured borrower's death, the insurer repays the remaining mortgage balance to the lender, freeing the property from the charge. The heirs then receive a mortgage-free property. However, it is important to distinguish mortgage loan insurance from individual life insurance. Mortgage insurance has the lender as beneficiary, its amount decreases with the loan balance, and coverage ends if you switch lenders. Individual life insurance is payable to beneficiaries of your choice, the amount is fixed, and the policy is portable.
Options for Heirs
- Assume the mortgage and keep the property: An heir may wish to keep the property, especially if it is the family home. The lender may agree to transfer the mortgage to the heir, subject to qualification under OSFI criteria (Guideline B-20). If the heir does not qualify with the current lender, an AMF-certified mortgage broker can seek refinancing with another lender.
- Sell the property: If the heirs do not wish to or cannot keep the property, selling allows the mortgage balance to be repaid. The prepayment penalty may apply, but several lenders waive it in case of death. The notary manages the transaction, repays the lender, and distributes the net balance to the heirs.
- Renounce the estate: If the estate's debts exceed its assets (including the property value minus the mortgage), heirs may renounce the estate under article 630 of the CCQ. This renunciation frees them from all obligations, but they lose all rights to the estate's assets.
The Prepayment Penalty in Case of Death
The question of the penalty in case of death is frequently raised. Technically, if the loan is repaid before the end of the term (by insurance, sale, or estate funds), the prepayment penalty could apply. In practice, the majority of major Canadian banks (RBC, TD, BMO, Scotiabank, CIBC) and several alternative lenders offer a penalty exemption in case of the borrower's death. However, this exemption is not universal and depends on the specific conditions of the mortgage contract. Verify with the lender or ask an AMF-certified mortgage broker to confirm the applicable conditions.
The Estate Liquidator's Role
The estate liquidator (designated by will or appointed by the heirs under art. 785 CCQ) is responsible for the entire process. They must inventory the assets, notify creditors including the mortgage lender, keep mortgage payments current, file the deceased's final tax returns with the CRA and Revenu Quebec, and distribute assets to heirs once debts are paid. Estate settlement in Quebec generally takes between 6 and 18 months. The lender must be notified of the death and the liquidator's identity as soon as possible.