What Is Mortgage Insurance And How Does It Work?

Ritu and Deepak are a couple who booked their 2-BHK in the metro city last year for approximately 82 lakh, it felt like a dream come true. Relying on a home loan, their EMI now consumes nearly half of their monthly income. 'EMIs' will be running for almost 20 to 30 years; it is no surprise that buying a house becomes one of the biggest financial responsibilities for any family.

What if something goes wrong? It could be a layoff, a medical crisis, or worse, the untimely demise of the borrower? Would the family be able to keep the home, or would the bank reclaim it?

Here comes mortgage insurance into play. While applying for a loan, you may have come across the term 'mortgage insurance' and are not sure about what it means or if you really need it.

Read on to get mortgage insurance explained and learn what mortgage insurance is, how it works, the types, and why it is important.

• What is Mortgage Insurance?
• Why is Mortgage Insurance important?
• What are the Types of Mortgage Insurance?

What is Mortgage Insurance?

A mortgage insurance policy is related to your home loan. Therefore, it is also known as home loan protection insurance. Unlike health or auto insurance, which directly benefits the policyholder, mortgage insurance is mainly designed to protect the lender if the borrower fails to repay the loan.

Put simply, when you take a home loan, the bank or housing finance company looks for some guarantee that the money will be repaid. If something unforeseen happens, such as the borrower passing away, suffering a disability, or getting into severe financial trouble, mortgage insurance steps in to cover the unpaid loan. This way, the lender’s risk is reduced, and the borrower’s family is not left carrying the entire burden.

In India, mortgage insurance usually comes in two forms.

• The first is meant for the lender’s protection. It covers the bank or housing finance company if the borrower fails to repay the debt.
• The second is for the borrower’s protection. It makes sure that if the borrower passes away. Left with a disability or diagnosed with a serious illness, the family does not have to struggle with the remaining EMIs.

For instance, suppose you have taken a home loan of INR 50 lakh for 20 years. Ten years down the line, if something unfortunate happens and you are no longer around, your family could find it difficult to manage the EMIs. Right? With mortgage insurance, the insurer steps in to clear the remaining loan. This way, your family can keep the house without the added burden of debt.

Why is Mortgage Insurance Important?

A home loan usually lasts for 15 to 30 years. Given the uncertain language of life, many things can change during that time, including medical emergencies, loss of income, disability, or even the borrower’s passing. These situations can put repayment at risk. Most importantly, if the loan is not repaid, the lender has the right to take legal action. They can even repossess the property. In such a case, the borrower’s family may lose the house.

Mortgage insurance offers key benefits-

• It repays the lender, prevents a debt burden for your family, and ensures your home stays with your loved ones even in difficult times.
• The borrower’s family is not left with a large debt.
• The property remains with the family and is not taken back by the bank.

​What are the Types of Mortgage Insurance?

Here are the different types of mortgage insurance available in India:

Mortgage Protection Insurance (MPI)

The policy pays off any outstanding home loan if the borrower passes away or becomes permanently disabled. Some policies also cover critical illnesses.

Lender’s Mortgage Insurance

This protects the lender if the borrower is unable to repay the loan, particularly when the down payment is small.

Group Mortgage Insurance

Some banks collaborate with insurance companies to offer group mortgage coverage to all their home loan customers. These plans usually come at a lower premium than individual policies.

Term Insurance Linked to a Home Loan

Instead of a separate mortgage policy, some borrowers opt for a term insurance plan with coverage equivalent to the home loan amount. If anything happens to the borrower, the payout can be used to settle the loan.

Final Words

Mortgage insurance is a protection plan linked to your home loan. It helps your family keep their home, even if unforeseen events impact your ability to pay. Before choosing mortgage insurance, compare different policies and carefully understand their terms. Remember: an informed decision not only protects your loan but keeps your family secure, even in challenging times.

FAQs on mortgage insurance