What Happens To A Home Loan If The Borrower Dies?

Home loan is a long-time commitment —the repayment tenure might span from 10 years to 30 years. This brings us to the question, what would happen to the loan if the borrower passes in the middle of the repayment schedule? Would the bank immediately take possession of the property and auction it to recover its money, a scene they invariably script in the movies? Would all the trouble that the late borrower took in paying the EMIs go in vain upon his demise? Do joint owners lose their right on the property?

There are many such questions that might pop in our heads when we think about the subject. In this article, we would first bust some of the myths that are often entertained in the matter.

Myth: Banks are just waiting to take over the property.

This is the most widely believed myth about home loans. No bank would ever want to repossess your property, no matter what they show you in the movies. Financial institutions are in the business of lending money and earning profits by imposing an interest on that. This is the reason why banks take so much trouble to establish the fact that the borrower is capable of repaying the loan — don’t you remember all the documents you had to submit at the time when you applied for a home loan? The best-case scenario for the bank is that you take a loan and repay it. Defaults are a bad scenario while repossession often proves worse still for banks. This is evident from the fact that banks are often not able to sell the asset to recover their losses when they auction; Vijay Mallya and Subroto Roy Sahara could be cited as classic examples here. Repossession and auction of property is simply a headache that no bank would want to have. They would exhaust all options before they opt for this one.

Myth: Property insurance may help.

Home loan insurance and property insurance are two different things. While the latter protects your loan against any casualty, the latter protects your property in case of emergency. In case the borrower dies during the repayment tenure, it is the home-loan insurance that would come handy. Property insurance has a different purpose altogether.

Myth: Home loan insurance is the panacea in such a scenario.

Well, home loan insurance plans certainly cover your outstanding loan liability in case of death during the loan repayment tenure. However, you must also keep in mind the fact that your home loan protection plan does not provide cover in case of natural death and suicide.

Now that we are clear of the misconceptions, let us see what would happen to the home loan.

If there is home-loan insurance

If the borrower bought a home loan insurance product along with the loan and has been diligently paying the premium, the insurer would settle the remaining amount with the banks, and the property would become free of all encumbrances. It is important to note here that home-loan protection plans are linked with the re-payment and the cover reduces along with the re-payment. This means if the borrower has already paid Rs 30 lakh of the Rs 50 lakh-loan amount, the insurer would settle the remaining Rs 20 lakh with the bank, if the borrower dies owing to an unnatural cause.

Further, this would happen only if the loan is not jointly applied for. In case the borrower has applied for the loan along with, say, his wife, the entire liability to repay the loan would shift to her.

Also read: 5 Points To Consider Before Buying A Home Loan Protection Plan

If there is no home-loan insurance

In case the borrower did not have home loan insurance, the responsibility to repay the loan would shift on the co-borrower/ co-signer, if such there is one, or the legal heir. While the legal heir may opt for a one-time settlement, they may also get the loan transferred in their name and serve the loan on the exiting terms and conditions.

If the legal heir is unable to repay

It is only when the legal heir shows his inability to repay the loan that the bank would go for repossessing the property in order to recover losses, and sell it in the open market. In case the property is worth more than the pending loan, the remaining amount would be paid to the legal heir. If the loan is more than what is earned through the sale, the legal heir would be responsible to bridge the gap.