Home Loan Insurance: Who repays loan when borrower dies? Is home loan insurance necessary?

Home Loan Insurance: Buying a dream house is marked on almost every individual's 'do-to list'. However, it requires a huge amount of capital to buy or build a house. Therefore, people often prefer taking home loans from banks or financial institutions. However, repaying a home loan can become a huge burden on an individual in case of any unforeseen instance, leading to the demise of the home loan borrower. The major concern is who will repay the loan if the borrower dies. One will say family members of the deceased. But what if the family members are not able to repay the loan? Will the lender seize the house? In such situations, home loan insurance can come to the rescue.

What is home loan insurance?

If someone has taken a loan and dies midway through repaying the loan, the remaining installments will be deposited through the insurance, and the house, or collateral, will remain safe. In such a situation, the lender cannot assert its rights over that house.

Often, homebuyers are suggested to buy home insurance to protect their investments, raising the question of whether home loan insurance is a good idea.

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Why is it necessary to buy home loan insurance?

It becomes necessary to buy home loan insurance to protect one against such adverse scenarios. Borrowers do consider taking a home loan protection plan. The loan is mostly given based on an individual's income-generating ability, and the borrower may/may not have any other asset or wealth to borrow against. If someone is not able to pay off the loan, i.e., defaults on the loan, the lender has the right to auction off the house property to recover their dues.

AR Hemant, AVP, BankBazaar.com, says, "In the typical case, the insurance cover helps pay off the loan if the borrower passes away. In other cases, the coverage may also compensate the borrower in case of a job loss. It’s not mandatory to own loan insurance, but if the borrower’s death can jeopardise their family’s homeownership, it should be availed."

How can one save money on home loan insurance?

According to Hemant, the objective should be to fully cover the risk.

Highlighting that the bigger the coverage, the bigger its cost, Hemant suggested that one can consider buying the coverage with a single premium instead of including the premium in your loan, which reduces your loan eligibility and also extracts interest on the premium.

Strategy to save money on home loan repayment

When one thinks of a home loan, one often worries about its repayment and strategies to finish it early.

Hemant says that the following are the three ways to serve the purpose:

1. Have a deadline to get out of debt – for example, 10 years.

2. Ensure that a fixed percentage of your loan is paid off every year.

For example, if you want to be debt-free in 10 years, you need to pay 10 per cent of the loan every year through EMIs and pre-payment. Use your amortization schedule and work out what you need to pay each year.

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3. Don’t pay a rate higher than you need to. If you’re eligible for an 8.5 per cent interest rate, you are advised not to pay 9.5 per cent. Having the right rate accelerates your payments. Negotiate for lower rates. Refinance to a lower rate, either with your lender or with one offering you better terms. 

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