An Explainer: Mortgage Guarantee

A concept popular in the West, mortgage guarantee is a tool that protects lenders from future defaults at the home buyers' end. Also known as mortgage insurance, this financial product compensates banks for losses that may arise when a home owner defaults on a mortgage loan.

However, this product is not to be confused with mortgage life insurance. Under mortgage life insurance, the insurer pays off a mortgage if the borrower dies or becomes disabled. Mortgage guarantee, on the other hand, is a credit risk mitigation tool, and does not cover life-related occurrences. The product is also different from home insurance, and does not guarantee protection to homeowners from losses incurred owing to theft, fire or other natural calamities. 

From cutting down risk exposure of financial institutions, this tool helps home buyers invest in property with lower capital than they are generally expected to bear when taking a home loan. For instance, a home buyer has to pay 20 per cent as down-payment while banks fund the 80 per cent of the total value. This tool allows home buyers to avail of loans even if they pay only the 10 per cent of the total value as down-payment. 

In India, India Mortgage Guarantee Corporation is the first and only company which offers this product. However, this tool is yet to gain traction in the country's financial system. Since its inception in 2013, the company has insured real estate loans to the tune of Rs 800 crore.