Mortgage insurance, a must for home loans, needs careful assignment
Under mortgage insurance, a home loan customer buys a life policy on himself to cover the loan and assigns it back to the lender; what's needed is greater transparency in the process and meticulous documentation
When one buys a house with a home loan repayable over a long period, say 20 years, in the form of equated monthly instalments (EMI), there is a gnawing fear in the minds of both the borrower and the lender.
The borrower fears that his near and dear ones would lose the mortgaged property in the unfortunate event of his premature death. The lender fears that the mortgage — which is his only security these days, what with the National Housing Bank (NHB) waiving guarantees and collaterals for salaried borrowers — may not be sufficient, especially in a falling market, to pay the unpaid principal amount of the loan.
It was out of these combined fears that the concept of mortgage insurance was born. The borrower takes out a life insurance policy on himself to cover the loan and assigns it back to the home loan company. Now both breathe easier.
Buying from related companies
So far so good, but the devil is in the cloak-and-dagger style adopted by the home loan company, which often is a financial supermarket with an in-house life insurance subsidiary in tow.
It tells the borrower in dulcet terms that he is free to take the mortgage insurance from anyone and not necessarily from its own group company but throws the bait dulcet — Hey look, if you take such insurance from our own company, you would get to pay the insurance premium along with the EMI whereas if you take the policy from an outsider, he will show you no such indulgence.
The borrower is unable to resist the bait and falls hook, line and sinker for it because a one-time or single premium is very high and difficult to rustle up when a house is being bought. After all, registration charges and interior decorators’ bills crowd in, applying relentless pressure on his tender finances.
Consumer court’s observation
The Bengaluru consumer court recently gave a dressing down to SBI and asked it to waive the loan of the deceased, who died during COVID but prior to that had been paying his all-inclusive EMIs (loan+interest+insurance premium) faithfully and on time.
SBI said while it was true that he was paying such an all-inclusive EMIs, he had not executed the necessary documents (assignment?) so as to secure its interests. The consumer court came down heavily on the financial behemoth for not doing its homework properly and shifting the blame on the benighted borrower.
The responsibility of completing documentation lay with the SBI group, the consumer court rightly observed.
Had he taken the mortgage insurance from someone else, SBI would have been justified in holding him liable for the delinquency of not completing the documentation, culminating in the assignment of the policy as collateral. It was not as if the court was taking up cudgels for David in his battle against Goliath. On the contrary, it was battling for justice. When you give services under one roof, you have to go the whole hog.
From the borrower’s standpoint, there is nothing wrong if she shops for both home loan and mortgage insurance under one roof — which indeed the concept of the financial supermarket is all about — other things being equal.
Indeed, in the Bengaluru case on hand, the legal heirs of the borrower were lucky that their benefactor shopped for both under the same roof because the consumer court would not have been sympathetic to their cause had the borrower taken a home loan and mortgage insurance from two unrelated entities.
For, from the lender’s standpoint, assignment is the key to securing its interest. Vide the assignment deed, the borrower authorises the insurer to pay the home loan company the proceeds of insurance in the unfortunate event of his premature death. So, normally, the onus is on the borrower to arrange for such an assignment deed which is a tripartite agreement involving the borrower, the insurer and the lender.
The consumer court shifted the onus on to the lender to drive home the message that when you embrace the concept of a financial supermarket i.e., providing comprehensive services to your customer all under one roof, you cannot shirk your responsibility by being a mute spectator, knowing pretty well that often the benighted borrowers are innocent about such complicated legalities.
Term insurance option
There is another option available, especially to young borrowers or borrower couples. They can take term insurance, where the life insurance premium is far lower than the mortgage insurance premium.
Let us say a youngster fresh out of college lands a good job and immediately sets about applying for a home loan, as is the norm these days. Converting your rent into EMI is more than a mantra now. Rent goes down the drain whereas EMI goes to build your house.
The youngster must do one more sensible thing — not fall into the trap of leisurely EMI-based life insurance premium for assigning to the home loan company as collateral. Rather, he should negotiate a term policy on vastly better terms to match the maturity and size of the home loan.
One must remember that mortgage insurance kicks in only when the borrower dies. In case he is alive, but defaults on EMI, neither he nor the lender can file a claim with the insurance firm. In that case, the housing loan company can always go for the sale of the mortgaged property.
Time for NHB to act
NHB must bestir itself and act. There is nothing wrong conceptually with mortgage insurance. But what is required is the education of the wannabes and reining in of Goliaths’ greed. The wannabes must be told that it is in their interest to take such insurance cover as, otherwise, the rate of interest on a home loan would be higher to mitigate the risk of the lender in the property market. And, it must mandate the home loan company to:
- Quote home loan interest transparently — rate of interest with mortgage insurance from the group company and rate without;
- Quote premium for the life insurance cover and leave it to the borrower whether to pay it upfront or build it into EMI for a home loan or procure such mortgage insurance from a third party
- Advise the borrower that if he already has taken a life insurance policy, it can be assigned to secure the home loan
(The writer is a CA by qualification, and writes on business, consumer issues and fiscal laws)