Mortgage insurance a necessary evil with the mortgage but needs reform
When buying a house with a home loan repayable over a long period, say 20 years in the form of equivalent monthly payments (EMI), there is a nagging fear in the minds of both the borrower and the lender.
The borrower fears that his relatives will lose the mortgaged property in the unfortunate event of his premature death. The lender fears that the mortgage – which is its only security these days, with the National Housing Bank (NHB) waiving guarantees and pledges for salaried borrowers – may not be enough, especially in a market down, to pay the outstanding principal amount of the loan.
It is from these combined fears that the concept of mortgage insurance was born. The borrower takes out a life insurance policy to cover the loan and on-lends it to the mortgage lender. Now both breathe easier.
So far so good, but the devil is in the swashbuckling style adopted by the mortgage lender which is often a financial supermarket with an in-house life insurance subsidiary in tow.
He tells the borrower in soft terms that he is free to take mortgage insurance from anyone and not necessarily from his own group company, but casts the soft bait – Hey listen, if you buy such insurance from our own company, you will have to pay the insurance premium with EMI, whereas if you buy a foreigner’s policy, he won’t show you such leniency.
The borrower is unable to resist the bait and falls on the hook, line and sinker because a one off or one off premium is very high and difficult to obtain when a house is purchased as the cost of recording and interior decorators charge the crowd by applying relentless pressure on its tender finances.
Bangalore consumer court recently disguised SBI and asked him to give up the loan of deceased deceased soul in the time of Covid but before that he faithfully paid his all-inclusive EMIs (loan+interest+bonus insurance) and on time.
SBI said that while it was true that he paid such an all-inclusive EMI, he failed to execute the necessary paperwork (surrender?) to secure his interests. The Consumer Court heavily accused the financial giant of failing to do its homework properly and blaming the blinded borrower.
The responsibility for completing the documentation fell to the SBI group, the Consumer Court rightly observed.
If he had taken out the mortgage insurance from someone else, then SBI would have been justified in holding him liable for the failure to complete the documentation resulting in the assignment of the policy as security. It wasn’t as if the Court took sticks for David in his battle against Goliath. On the contrary, he was fighting for justice. When you offer services under one roof, you have to do everything possible.
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From the borrower’s perspective, there is nothing wrong with buying both home loan insurance and mortgage insurance under one roof – making it the concept of the financial supermarket – all things being otherwise equal.
Indeed, in the Bangalore case, the legal heirs of the borrower were lucky that their benefactor had purchased both under the same roof, as the consumer court would not have favored their case if the he borrower had taken out a home loan and mortgage insurance with two unrelated entities.
Because, from the lender’s point of view, the assignment is the key to securing its interests. By the deed of assignment, the borrower authorizes the insurer to pay the building society the proceeds of the insurance in the unfortunate event of his premature death. Thus, it is normally the responsibility of the borrower to arrange such a deed of assignment which is a tripartite agreement involving the three parties – borrower, insurer and lender.
The Consumer Court shifted the responsibility to the lender to convey the message that when you embrace the concept of a financial supermarket, i.e. providing full services to your customer under one roof, you You cannot shirk your responsibility by being a mute spectator knowing well enough that often ignorant borrowers are innocent of these complicated legalities.
Term insurance option
There is another option available especially to young borrowers or borrowing couples. They can take out term insurance on attractive terms, with term insurance premiums being much lower than the mortgage insurance premium.
Let’s say a kid fresh out of college lands a good job and immediately starts applying for a home loan, as is the norm these days. Converting your rent to EMI is more of a mantra now. The rent falls by the wayside while EMI is going to build your house. He needs to do another sensible thing – not fall into the trap of the EMI-based life insurance premium to be ceded to the mortgage lender as collateral, but take out a term insurance policy on good terms. best to match the maturity and size of the home loan.
NHB must stir and act. There is nothing conceptually wrong with mortgage insurance. But what is needed is the education of the aspirants and the mastery of the greed of the Goliaths. Aspirants should be advised that it is in their best interests to take out such insurance coverage because otherwise the interest rate on a home loan would be higher to mitigate the lender’s risk in the property market. And he must mandate the mortgage company to:
- Quote the interests of the mortgage in full transparency. Interest rate with group company mortgage insurance and rate without;
- Quote the premium for life insurance coverage and leave it up to the borrower to pay it upfront or incorporate it into EMI for a home loan or purchase such mortgage insurance from a third party; and
- Warn the borrower that if he has already taken out life insurance, it can be assigned as collateral for the mortgage.