Mortgage and Death: Estate Guide for Quebec

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What happens to the mortgage upon death?

In Quebec, when a mortgaged homeowner dies, the mortgage debt does not automatically disappear. The mortgage constitutes a real security (real right) registered in the Quebec Land Register that encumbers the property regardless of the owner. Under the Civil Code of Quebec (art. 625), heirs who accept the succession inherit both the deceased's assets and liabilities. The mortgage lender retains its rights over the property and can require repayment according to the terms of the mortgage contract.

The role of mortgage loan insurance

Mortgage loan insurance in case of death is specifically designed to repay the loan balance to the insurer upon the borrower's death. There are two main types. Insurance offered by the lender (often called mortgage life insurance) is group insurance where the beneficiary is the lender itself; the coverage amount decreases at the same rate as the loan balance. Individual life insurance is purchased from an independent insurer; the designated beneficiary (spouse, children) receives the amount and decides its use, providing more flexibility.

Responsibilities of the estate liquidator

Notify the mortgage lender: The liquidator must notify the lender of the death as soon as possible, providing a copy of the death certificate. This activates the insurance process if applicable and prevents misunderstandings about payments.
Verify insurance in force: Check if the deceased had mortgage loan insurance through the lender, individual life insurance, or any other coverage that could be used to repay the loan. Submit claims to the relevant insurers.
Maintain mortgage payments: During estate settlement, mortgage payments must continue to avoid default and potential foreclosure. The liquidator can use estate funds to make these payments.
Evaluate the options: In consultation with the heirs, déterminé whether the property will be kept (an heir assumes the mortgage) or sold (the sale proceeds repay the lender). This decision depends on the heirs' financial situation and the property's value relative to the mortgage balance.
Complete the transfer or sale: If an heir keeps the property, the notarial transfer and mortgage assumption (or refinancing) must be formalized. If the property is sold, the notary will ensure the lender is repaid from the sale proceeds.

Tax implications upon death

In Canada, there is no inheritance tax as in some other countries. However, the Income Tax Act provides for a deemed disposition at death: the deceased is deemed to have disposed of all their property at fair market value immediately before death. If the property is the deceased's principal residence and was designated as such, the capital gain is exempt. If the property is a rental building or secondary residence, the capital gain is taxable on the deceased's final tax return. Since the 2024 fédéral budget, the capital gains inclusion rate is 50% for the first $250,000 in net gains and 66.67% beyond that for individuals.

The mortgage broker's role in this process

A mortgage broker can play a valuable role in the estate process related to the property. They can help heirs understand the terms of the existing mortgage, assess their eligibility to assume the loan or refinance, negotiate advantageous conditions if a new loan is needed, and coordinate with the lender and notary to facilitate the transfer. The emotional situation surrounding the death of a loved one makes this professional guidance all the more important.

Frequently Asked Questions

Is the mortgage automatically paid off upon death?

No, unless the deceased had mortgage loan insurance that covers the balance at death. The lender's loan insurance (often offered at signing) typically repays the full loan balance. Individual life insurance can also be used, but the beneficiary receives the funds and decides their use. Without insurance, the mortgage balance remains a debt of the estate.

What must the estate liquidator do regarding the mortgage?

The liquidator must notify the lender of the death, continue mortgage payments to avoid default, verify if loan insurance is in effect and submit a claim if applicable. They must also assess whether the estate can afford to maintain the property or if it needs to be sold. Any major decision must be communicated to the heirs.

Can heirs keep the mortgaged property?

Yes, but they generally must assume the existing mortgage or refinance the loan in their name. The lender will assess their repayment capacity using the same criteria as for any new borrower. If the deceased had an advantageous rate, it may be possible to maintain existing conditions until the next renewal, depending on lender policies.

Are there taxes to pay on the property at death?

In Canada, there is no inheritance tax. However, the Income Tax Act provides for a deemed disposition at death. If the property is the deceased's principal residence, the gain is generally exempt. If it is a rental or secondary property, the capital gain is taxable on the deceased's final tax return. The inclusion rate is 50% for the first $250,000 in gains and 66.67% beyond that.

How can I protect my heirs from the mortgage burden?

The best protection is to purchase sufficient life insurance to cover the mortgage balance. Individual life insurance is generally more advantageous than the lender's loan insurance because it is portable, the coverage amount does not decrease, and the beneficiary chooses how to use the funds. Discuss with your mortgage broker and an insurance advisor to déterminé adequate coverage.