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Dealing with home loan insurance in case of loan takeover

Home loan insurance is a must given the size of the liability. When you are changing the financier for the loan, it make sense to revisit your home loan insurance arrangement.

November 17, 2015 / 04:52 PM IST
Adhil Shetty

Home loan is one of the biggest liabilities for most families. The EMI is also the biggest outflow from the monthly income of most households. So, it is quite natural to look for ways to reduce the outflow. Home loan takeover, or refinancing, is one such way.

In a home loan takeover, another bank takes over your loan, possibly at a lower interest rate. A lower interest rate is the most common reason for refinancing a home loan. Refinancing your loan involves several formalities and brings about changes that you need to keep track of. Since most banks also offer home loan insurance with the home loan, it is imperative for home buyers to know what happens to the home loan insurance once the financier changes.

Home loan insurance in case of loan takeover

Loan takeover can happen with a lower interest rate as well as with a higher loan amount. Let us look at both the cases and see how the home loan insurance works out.

Suppose a homebuyer books an apartment worth Rs. 50 lakh. He pays Rs. 10 lakh as down payment and takes Rs. 40 lakh as loan. The homebuyer has also taken home loan insurance from the bank. After paying the EMI for about six months, he gets an offer from another bank with an interest rate that is 1% lower. The homebuyer, sensing a good deal, decides to take up the offer.

Case 1: The interest rate offered by new bank is lower

Once the homebuyer has accepted the offer, the new bank takes over the home loan on receiving the sanction letter copy from the former bank. It assesses the property, and doesn’t see much change in evaluation; hence, it assesses the property at the same value. The new bank then agrees to take over the outstanding loan.

Now comes the insurance part of the loan. Even though the home loan insurance was bought through the first bank, the homebuyer may continue the same home loan insurance. The bank is just an agency that has sold the insurance. The insurance company is a different legal entity and, hence, there is no change in the relation between the homebuyer and the insurance company. All he has to do is to inform the insurance company about the change in financier.

However, if the homebuyer wants to close the earlier insurance and get a new one, he is free to do so.

Case 2: The interest rate offered by new bank is lower, loan eligibility is higher

Since the loan amount is higher, the home loan insurance, which offered a lower cover, needs to be changed. Here the bank may insist on buying extra cover or may be fine with the existing cover even though the latter is inadequate by a small margin.

Even when the bank insists, the buyer enjoys the same choice as in case one. He can contact his insurance company, inform about the home loan takeover, and take extra cover by paying for it. There is absolutely no need to close the earlier home loan insurance just because the insurance amount has changed.

Case 3: Home loan insurance premium is bundled with home loan

The complication occurs when your home loan insurance premium is added to your home loan. Therefore, your home loan EMI also includes the EMI for the premium. In this case, things turn quite complicated. You may have to close the earlier home loan insurance and opt for a new one. However, this depends on the banks and the insurance companies. Check with the bank that has given you the loan in this case. Insist on written rule in such cases rather than relying on verbal information.

Important points for homebuyers

First, look at the real differential rate that the other bank offers. You may have to pay refinancing fees, documentation charges, etc. for the refinancing. Factor these expenses into the savings accrued because of lower interest and then decide accordingly. Many times, a small differential of 0.5% may not be worth the hassles and extra fees associated with refinancing.

It is always better to pay the premium for home loan insurance separately than to combine it with the home loan and pay EMI on it. Most of the lenders prefer a single payment premium for the home loan insurance. Pay it separately on your own and restrict the loan to home loan only. You can track your EMI in a much better way.

Finally, keep looking at refinancing options from a number of banks. If a bank has given you an offer to take over your home loan, chances are that other banks may offer the same. In fact, your current lender may also offer the same if you negotiate. You may get a better offer or avoid the paperwork if your current lender reduces the EMI.

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