Moneycontrol PRO
UPCOMING EVENT:Moneycontrol Pro & Espresso (A Sharekhan Company) in association with Intrazon 2.0 bring to you India’s Largest Retail Intraday Traders Online Conference. Learn 12 Amazing Strategies from 12 Intraday Traders @ Rs. 600/-. Register Now!

Home loan dues of a deceased person: Co-borrower or legal heir must repay the bank

In case of the demise of the borrower, the bank can help on compassionate grounds to make the repayment process easier

November 26, 2021 / 10:03 AM IST
Representative image

Representative image

Over the past 18 months, the COVID-19 pandemic has disrupted many people’s finances.

One sticky situation that the near ones of deceased family members have found themselves in is when they discovered home loans that the persons who passed away were repaying.

If a borrower passes away without fully repaying the loan, the obligation falls on to the co-borrower(s) or legal heirs.

Was the home loan insured?

Check the home loan documents thoroughly to see if the deceased borrower had taken a home loan insurance. Or, ask the bank if there was one. “A home loan insurance is a guard against the risk of default in the event of the untimely demise of the borrower. Because of such uncertainty, during the loan tenure, the insurance company will settle any outstanding amount on the home loan with the lender,” says Adhil Shetty, CEO of BankBazaar.com.

Close

Lenders mainly offer two types of home loan insurance policies – a reducing balance plan or a level cover plan. In a reducing balance insurance plan, the coverage and outstanding loan reduce with the tenure. “In the reducing balance plan, when there is a claim because of the demise of the borrower, the insurance firm settles the outstanding dues of the bank,” says Atul Monga, Co-founder and CEO of BASIC Home Loan.

In a level cover plan, the insurance cover remains the same throughout the loan tenure. Let’s say the deceased borrower had taken an insurance cover of Rs 1 crore against a home loan. If she had serviced a Rs 50 lakh loan with regularly, upon the demise of the borrower, the insurance company will repay Rs 50 lakh dues to the bank. The insurance company will give the remaining Rs 50 lakh to the borrower’s family who had taken the loan.

Can the insurance company deny the claim?

Yes, an insurance company can deny the claim in case of non-disclosure of pre-existing health conditions, which violates the insurance agreement. The insurance company processes the home loan insurance only in case of natural or accidental death of the borrower.

Home loan insurance products are expensive and so the lender includes the premium in the loan amount. Shetty says that some people take a home loan with an insurance cover (the premium gets embedded in the EMI) and then port over to another bank for a cheaper home loan. “The insurance policy bought would not be ported,” he cautions. In such cases too, your insurance claim will be denied.

The tenor of the policy is usually the same as that of the home loan. “However, if the tenor of the loan goes up because of a hike in interest rates, the insurance policy may not fully cover the loan,” says Shetty. So, the co-borrower will have to shell out an additional amount on the demise of the borrower.

Repayment without home loan insurance

In the absence of a home loan insurance policy, the responsibility to pay up the loan would fall upon the co-borrower. The bank will also contact the home loan guarantor and the legal heirs for repayment of loan EMIs. In case of the demise of the borrower, the bank can help on compassionate grounds to make the repayment process easier.

“The bank would offer due time and flexibility for repayment. Approach the bank and request for loan restructuring, moratorium of 3-6 months, or make a one-time settlement according to your cash flows,” says Raj Khosla, founder and MD of MyMoneyMantra.com. He adds that another option is to transfer the loan to other legal heirs who have a stable income stream. The bank will be flexible and reset loan terms according to the repayment capacity of the new homeowner.

Also read: Repaid your home loan fully? Here’s what you must do with your EMI money

Can a lender take possession of the property?

Yes, the lender can take possession of the house under the SARFAESI Act, if the family or legal heirs cannot repay the outstanding loan. “The lender then auctions the property to recover its dues,” says Shetty. However, taking possession of the property is the last choice for the bank. “The prime business for a lender is lending and not conducting property auctions. The bank would earnestly help the family make arrangements for repayment,” says a retail banker of a public sector bank requesting anonymity.

Before taking possession of the property, lending institutions give sufficient time to the co-borrowers and legal heirs. The bank will classify the borrower's account as non-performing asset (NPA) only after the home loan amount is overdue by 90 days. Next, the bank will furnish a written demand notice to the co-borrowers requesting them to discharge liabilities within 60 days. “On failure to respond to the same or after 30 days of any receiving dissatisfactory explanation, the bank will go ahead with the public sale of the asset,” says Khosla. The bank will serve another 30-day public notice, sharing the details of the sale. He adds, in case the family makes some payment within this period, they will get some breathing space to re-negotiate repayment terms.

To protect your family from loan liabilities due to any untimely demise, home loan insurance is a must while taking the loan. “Just like financial planning, it is essential to plan a repayment backup in case of untimely death,” says Khosla.
Hiral Thanawala is a personal finance journalist with 9 years of reporting experience. Based in Mumbai, he covers financial planning, banking and fintech segments from personal finance team for Moneycontrol.
first published: Nov 26, 2021 10:03 am

stay updated

Get Daily News on your Browser
Sections
ISO 27001 - BSI Assurance Mark