Insurance While Refinancing a Home Loan

Home loans are possibly the biggest liabilities to a family. The Equated Monthly Instalments (EMIs) on these home loans are one of the biggest constant expenses to a family’s income. Therefore, many families look at ways to reduce this expense and one of the most popular ways to do so is by refinancing a home loan, also known as, home loan takeover. A home loan takeover is a situation in which a bank takes over a loan, possibly at a lower interest rate. The main reason for refinancing a home loan is to get a lower interest rate. There are many changes that come about as a result of refinancing a home loan and as most banks provide home loan insurance with your home loan it is imperative that you understand what changes take place to the insurance policy in case of a loan takeover.

Insurance on Home Loan During Refinancing of an Existing Home Loan

Home loan takeovers can give you a lower interest rate or a higher loan amount. Let us analyse what happens to the insurance on the home loan in both of these scenarios.

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Scenario 1.

A homebuyer, after taking a home loan and after paying the EMIs for a few months decides to change the bank that is financing the loan. The new bank will take over the loan from the former bank after receiving a sanction letter from the former bank. The new bank will assess the property and value it, if the value of the property remains unchanged the bank will finance the outstanding amount of the loan. The insurance required, therefore, will remain the same. The homebuyer can choose to continue with the same insurance policy as the insurance company of the previous bank is a separate legal entity to the bank, the bank is an agent for the insurance company. The homebuyer will just need to inform the insurance company about the change in the financier. However, if the homebuyer would like to change the insurance policy he/she is free to do so.

Scenario 2.

A homebuyer decides to refinance an existing home loan via a different bank because it is offering a lower interest rate, but after valuation of the property the bank concludes that a higher loan amount is required, therefore, the previous insurance coverage will be considered insufficient. The bank will request the homebuyer to get a higher insurance cover for the home loan. The homebuyer still has the choice to continue with his previous insurance policy, but will need to increase the amount of cover he/she has on it. The homebuyer will need to inform the insurance company about the change in financier. The homebuyer is free to change the insurance policy if there is a better suited policy for the home loan.

Scenario 3.

A homebuyer decides to refinance an existing home loan because he/she has found a bank that is providing a lower interest rate. But the existing home loan has the insurance premium added to the EMIs. In such cases banks will request the homebuyer to change the insurance policy on the home loan.

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Other Important Pointers.

•Homebuyers should look into the real differential rate while refinancing a loan. Sometimes banks have a refinancing fee, documentation charges, etc. for refinancing loans. For a small drop in the interest rate, these expenses might actually increase the total expense of the refinanced home loan.

•Homebuyers should try to pay the insurance premium separate to the home loan amount, as it is easier to track EMIs on the loan.

•Keep an eye out for refinancing options as banks continuously have different offers on various different products offered by them.

•Homebuyers should try to negotiate the interest rates with their existing loan banks so as to avoid the paperwork and other formalities of refinancing a home loan.

4 points to consider while taking a home loan

The amount of home loans taken against property right now is valued at Rs.2.5 trillion, and that amount is on its way to becoming Rs.5 trillion by 2019, with a 22% projected growth in the next 4 years. If you’re planning on taking one of these, here’s four things you should know:

Interest rates and tenures. Home loans and loans against property are secured loans. This means you have to mortgage your property with the lender in order to get one, thus considerably reducing the risk level of the bank or NBFC that’s giving it to you. A reduced risk means lower interest rates, of between 9% - 15%, depending on a lot of factors including your current employer, income, CIBIL score and market value of the property pledged. You can have tenures as low as 5 years and up to even 30 years depending on your earning potential, loan amount required, stability and patience.

Loan amount. Banks and NBFCs typically only give you between 50% - 65% of the market value of your property as a loan. Lenders consider your repaying capacity as the difference between your income and current EMIs, and decide how much you can pay back on a monthly basis after interest and in the tenure you choose. Loans can be sanctioned from Rs.2,00,000 to a few crores depending on your ability to repay and the tenure you want.

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Charges. Lenders take a sizeable chunk under what’s called a “one-time processing charge” which can range from 0.50% to 5% (in addition to a 14% Service Tax) and can be entirely avoided depending on your negotiating and offer-leveraging skills. Processing charges are sometimes deducted from your sanctioned loan amount. Another common charge is the “pre-payment” charge, which is levied if you wish to clear off your loan before the tenure ends. There are also charges in the form of penalties which will be charged if you don’t make payments on time or default on your loan, which vary between lenders but are generally in the range of around 3% - 8%. These penalties hurt you in multiple ways, as they will also negatively impact your CIBIL score. Stamp duties and other charges are levied as per state laws.

  Documents required. When applying for a home loan or a loan against property, you’ll need the following documents: Photo proof of identity. Proof of residence. Proof of income through salary slips (for the last 6 months) or bank statements. Form 16. Income tax returns. Profit and loss account statement (for self-employed persons). Taking a home loan is as dangerous as taking any other kind of loan. If you miss payments and become a defaulter, the bank will take your property and levy crippling charges and penalties on you. Choose wisely, and ensure you have a regular income and sufficient funds to repay your loan EMIs as and when they become due. Shop around, better deals are around the corner. Try the eligibility calculator and home loan comparison tool on BankBazaar.com to find the best deal for you.