What happens to a bond when the owner dies?

The family has a house, a funeral, and a bond statement that keeps arriving. Nobody is sure who is supposed to pay it, and everybody is worried that the bank will take the house.

The answer depends on facts that are usually discoverable within a week and usually not looked for until months later.

The bond is a debt of the estate

A mortgage bond is a loan secured over the property. On death, the loan does not disappear and it does not transfer automatically to anybody. It becomes a liability of the deceased estate, and the bank becomes a secured creditor of that estate, with the house as its security.

That places the bond within the ordinary administration of the estate, which our guides on reporting an estate to the Master and letters of executorship set out. The executor deals with it. The heirs do not owe it personally, and the bank cannot pursue a child of the deceased for a shortfall, unless that person signed surety or was a co-borrower.

Our guide on what happens to a house when the owner dies covers who inherits the property and how transfer works. This page is about the debt sitting on top of it.

First question: is there bond cover

Before anything else, find out whether the loan carried credit life insurance, often called bond cover or bond protection.

Banks commonly require or offer this when a home loan is granted, and the premium is usually collected with the instalment. Where the policy exists and responds, it settles the outstanding bond balance on death. The house then passes to the heirs unencumbered, and an estate that looked insolvent on paper is suddenly solvent.

Where to look:

• the bond statement, for a premium line
• the bank, which will confirm whether a policy was taken out with the loan
• the deceased's papers and email, for a separate policy ceded to the bank
• the employer, where group life cover was ceded

Ask the bank in writing, early, and ask it to confirm whether any policy has been ceded to it. Families sometimes sell a house to settle a bond that a policy would have paid.

Where the policy exists, the claim is made through the executor and the proceeds go to the bank against the bond. What the family should watch for is the timing: policies pay after documents, and the bank may continue to charge interest until it does.

The instalments do not pause

This surprises everybody.

The administration of an estate takes months and often longer, and our guide on how long it takes to wind up an estate sets out why. Throughout that time the bond is a live loan: interest accrues, instalments fall due, and arrears accumulate if nobody pays them.

The bank is entitled to be paid from the estate, but it does not have to wait patiently while the estate is wound up. A bond that falls badly into arrears during the administration can be called up, and the bank can take steps against the property as a secured creditor.

So one of the executor's first practical decisions is whether and how the instalments will be met in the interim. Options:

The estate pays them, from estate funds, where there are any.

An heir who intends to keep the house pays them, keeping proof, and is credited in the account for having done so.

The occupant pays them in lieu of rent, by agreement with the executor.

Nobody pays, and the arrears are settled from the proceeds on sale, which is the default outcome where the house is to be sold anyway and the estate has no cash.

What must not happen is silence. Write to the bank, tell it the owner has died, give it the executor's details, and ask what arrangement it will accept during the administration. Banks are generally willing to hold their hand where they are kept informed; they are not where they are not.

If an heir wants to keep the house

The most common wish and the most often frustrated.

An heir cannot simply carry on paying the bond in the deceased's name indefinitely. The loan was granted to the deceased, and the property has to be transferred to the heir with the bond dealt with. There are two ways.

Settle the bond and take transfer unencumbered. From bond cover, from other estate assets, or from the heir's own funds or a new loan in their own name.

Take over the existing bond. This is a substitution of debtor under section 57 of the Deeds Registries Act 47 of 1937, which allows the heir to be substituted for the deceased as debtor under the bond when the property is transferred. It requires:

• the bank's consent, which is not automatic
• the heir to qualify for the loan on their own income and credit record, as if applying afresh
• the whole of the property under the bond to be transferred to the heir
• the heir's own consent to being substituted

The bank's assessment is the hurdle. A child earning a modest salary does not qualify to take over a R1.8 million bond merely because they inherited the house, and the bank will decline. Where it does, the choices are a smaller loan with a cash contribution, a sale, or a family arrangement in which somebody who does qualify takes it on.

Where the bank consents, the substitution is registered and an endorsement is placed on the bond by the deeds office recording the new debtor.

The surviving spouse

Two very different positions, depending on the marriage.

Married in community of property. There was one joint estate, and the house and the bond were joint assets and joint liabilities throughout. On death, half of the joint estate already belongs to the survivor. Where the survivor inherits the deceased's half, section 45 of the Deeds Registries Act may allow the property to be transferred to them by endorsement, which is faster and considerably cheaper than a full conveyancing transfer. The bond is dealt with in the same process, and the survivor, who was in substance always a debtor on it, remains so.

Married out of community. The property and the bond belong to whichever spouse held them. A surviving spouse who inherits is in the position of any other heir: cover, settle, or substitution with the bank's consent. Our guide on antenuptial contracts explains why this difference exists.

In either case, a spouse who was a co-borrower on the bond remains liable on it in their own right. Death of one co-borrower does not release the other.

If the estate cannot carry it

Where there is no cover, no cash and no heir who qualifies, the house is realised.

The executor sells it, the bank is paid from the proceeds as a secured creditor, and any surplus goes to the estate for distribution. Any shortfall becomes an unsecured claim against the estate, which ranks with the other creditors and is not the heirs' problem.

A family member who can raise finance can buy the property from the estate at a proper value, which keeps the house in the family and pays the bank. That is an ordinary sale and it needs to be done at arm's length, because the executor owes duties to the creditors and to the other heirs.

Our guide on what happens if an estate is insolvent covers the position where the bond exceeds the value of the house.

Worked example

This example is illustrative. A woman dies owning a house worth R1.6 million with R700 000 outstanding on the bond. Her will leaves the house to her son, who earns R28 000 a month and lives in it.

Step one. The executor asks the bank whether the loan carried credit life cover. It did not.

Step two. The executor tells the bank the owner has died and agrees that the son, who wants to keep the house, will pay the monthly instalment of R7 400 during the administration, keeping proof. The arrears do not accumulate.

Step three. The son applies to the bank to be substituted as debtor under section 57 for the R700 000 balance. On his income the bank is prepared to lend R650 000. He contributes R50 000 from his own savings towards the bond, the bank consents to the substitution for the reduced balance, and the property is transferred to him with the bond endorsed in his name.

Had the son earned R12 000 a month, the bank would have declined. His options would then have been to sell, or to find a family member who qualified, or to buy the property from the estate with a smaller loan and a larger contribution. What would not have been available was continuing to pay his mother's bond in her name for the next fifteen years, which is what a great many families in this position quietly attempt.

Had the loan carried bond cover, every step above would have been unnecessary. The policy would have settled the R700 000, and the son would have inherited a house with no bond on it. That is why the first question is the first question.