The co-borrower or legal heir will have to repay if the mortgage borrower dies
People take out different types of loans from banks or certain financial companies. From auto loans to home loans and personal loans to gold loans, people take out loans for their personal benefits. However, they sometimes encounter difficulties in repaying the loan. The COVID-19 pandemic has added to their homework. In some cases, the borrowers have died due to the virus. In such cases, do you know what happens to the loan and who has to pay it back?
According to reports, the obligation falls on the co-borrower (s) or legal heirs in the event the borrower dies without repaying the loan in full. On the other hand, they will be exempt from repayment of the loan if the borrower had taken out mortgage loan insurance.
You need to know if the mortgage was insured
When the borrower dies, the co-borrower (s) or legal heirs must check whether there is mortgage loan insurance. To do this, you have to go through the mortgage documents or ask the banks concerned. Because home loan insurance, according to Adhil Shetty, CEO of BankBazaar.com, is a guard against the risk of default in the event of the premature death of the borrower. Because of this uncertainty, during the term of the loan, the insurance company will settle any outstanding amount on the home loan with the lender, Shetty said, as quoted by moneycontrol.com.
There are two types of home loan insurance policies: a) a reducing balance plan and b) a level coverage plan offered by lenders.
a) Decreasing plan: If you take out the home loan as part of a degressive insurance, then the coverage and the outstanding amount of the loan decrease with the duration of occupation.
b) Level coverage plan: In a level coverage plan, the insurance coverage remains the same throughout the life of the loan. You would understand that very clearly if someone gave you an example. Let’s say the deceased borrower had taken out insurance coverage for Rs 50 lakh against a home loan. However, you only paid 25 lakhs before your untimely death. In this case, the insurance company will reimburse the contributions of Rs 25 lakh to the bank. The insurance company will remit the remaining Rs 25 lakh to the co-borrower or legal heir of the borrower to repay the loan.
The insurance company will reimburse the loan due if the mortgage loan is taken out under the level coverage plan. However, there are certain conditions for this.
Can the insurance company deny the claim of the co-borrower or legal heir?
Yes, the insurance company has the right to deny the co-borrower’s or legal heir’s claim for non-disclosure of pre-existing health issues as this violates the insurance contract. The insurance company will only reimburse the loan if the borrower dies naturally or after being the victim of an accident.
The insurance claim will also be denied if the home loan is taken out at a bank or business and then transferred to another bank or business for a cheaper home loan.
How to repay the loan if the mortgage is not insured?
The co-borrower will have to repay the loan in the absence of a mortgage insurance contract. The bank will also contact the mortgage guarantor and legal heirs and may help on humanitarian grounds to facilitate the repayment process.
Can banks or finance companies take possession of the asset?
The bank or finance companies have the right to take possession of the property under SARFAESI law if the family or legal heirs do not repay the unpaid loan. However, taking possession of the asset is the bank’s last choice. Before doing so, the lender should allow sufficient time for the co-borrowers and legal heirs.
The lender will classify the borrower’s account as non-performing asset (NPA) only if the monthly mortgage EMI is not paid for 90 days. After classifying the borrower’s account as NPA, the bank will provide a written notice of application to the co-borrowers asking them to pay off their debts within 60 days.
“If there is no response to the same or after 30 days of receiving an unsatisfactory explanation, the bank will proceed with the public sale of the asset,” Khosla said, quoted by moneycontrol.com. “The bank will serve another 30-day public notice, sharing the details of the sale. If the family makes a payment during this period, they will have a bit of a break to renegotiate the repayment terms, ”he added.
The best way to avoid repayment of the loan by your co-borrower or legal heir after your death is to purchase mortgage insurance.