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Home Loan Protection Plans Research Team | Posted On Friday, September 07,2018, 04:21 PM

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Home Loan Protection Plans



After you choose a lender or bank, they may insist on you buying a Home Loan Protection Plan (HLPP). They may also tell you that it’s compulsory.

HLPP is an insurance plan that covers any outstanding Home Loan, in the event of your death within the loan tenure. The insurer pays the outstanding loan amount to your lender. The policy term for this insurance is usually same as the loan tenure. Your family will not have to vacate the house due to default on repayment of Home Loan after your demise.

An HLPP is not the same as home or property insurance. Home Insurance covers risks to property/home due to earthquake, fire, theft and so on. Home Insurance could be mandatory. In these cases, it will be mentioned in the Home Loan agreement.

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Premium payment:

HLPPs are mostly single premium policies. Though you can select from two of their variants, regular premium and limited premium payment plans.

1.  Regular premium plans: The term of premium payment is same as policy term.

2.  Limited premium payment plans: The term of premium payment is less than the policy term.

A bank may give you an option to club the premium amount with the loan amount.

How does an HLPP work?

  • The insurer settles the loan with the bank in the event of your demise.
  • Excess funds if any, after loan repayment, are handed over to your nominee.

Merits of HLPP:

1.  In case of your demise, the insurer settles the loan with the lender.

2.  The excess amount after paying off the loan is paid to nominees.

3.  You are eligible for tax benefits under Section 80C.

4.  You can also opt for riders like critical illness or disability. The premium will increase accordingly.

5.  There is no need to avail separate term plans for the co-borrowers in a joint home loan. A single life cover is enough.

Demerits of HLPP:

1.  HLPPs are expensive.

2.  If you choose to club premium with the loan amount, i.e., a single premium policy, you will not be entitled to any tax benefits for the year under Section 80C. This is because bank pays the premium on an HLPP. However, few plans provide a separate receipt on premium for 5 years, so that you can claim a tax deduction.

3.  Your life cover will continue only until the end of the policy period.

4.  The surrender value of a single or limited premium plan ranges from 50% to 70% of remaining premiums.

5.  Regular premium plans do not have any surrender value.

What if the bank officials insist on purchase of HLPP?

Banks may sometimes say that it is their policy for Home Loan borrowers to avail an HLPP. You must know better than to buy the HLPP. If the bank forces you to avail HLPP:

1.  Ask them to give in writing.

2.  Challenge them that you’re aware of the rules and that it is not compulsory. Ask them to show the relevant clause in the loan agreement.

3.  Escalate the matter to the Senior Management by dropping an e-mail to the MD or CEO of the bank.

Which is better: Term Plan or HLPP?

Term plan is better than HLPP because:

1.  Term plan is cheaper than HLPP.

2.  In an HLPP, life cover keeps decreasing as you pay the loan. Life cover in Term Insurance doesn’t change.

3.  Term Plan cover continues even if you shift the loan to another lender. You’ll have to forgo your premium in case of HLPP.

What to keep in mind:

Some banks may offer you a Term Insurance Plan instead of an HLPP. However, don’t blindly accept the offer because premiums in such cases may be higher. Insurance is a third party product, so commission will be involved, and the bank will recover it from you. The best thing to do is to compare premiums of other term plans online and then decide which one is best and affordable.

Dual rate Home Loan:

Dual rate Home Loans are fixed-cum-floating rate home loan. They start off with 1 to 5 years of fixed interest rate and then floating interest is applicable on the outstanding Loan amount. Sometimes, fixed interest rates are set low (called teaser rates) to attract borrowers, then later, they shoot up. Fixed interest rates are ascertained on the basis of loan amounts and tenure.

Why are dual rate Home Loans offered?

Lenders offer dual rate Home Loans for a variety of reasons:

1.  To lure customers who are hesitant in purchasing property due to high interest rates.

2.  When interest rates are expected to decline.

3.  Competition from lenders.

4.  To meet targets.

Pre-approved home loan:

A pre-approved home loan is a facility offered by a lender, where you can get your Home Loan approved before finalizing on the property that you wish to acquire. It is granted based on your salary/income, credit history and other factors just like the normal Home Loan. The validity of a pre-approved Home Loan is around 6 months. You must finalize the property within this time.

Benefits of pre-approved loans:

1.  Plan your finances: Pre-approved loans give a clear idea on how much you can borrow from a bank. Banks sanction an amount based on your eligibility. As a result, you can arrange for down-payment, plan on how to meet other obligations and arrange funds accordingly.

2.  Faster processing: Banks only evaluate your financial documents. Time spent in verifying property documents is saved. This makes processing much faster. After deciding on the property, if you submit all the property documents to the bank in time, and if there is no change in your income, only your property documents and not income documents will be verified. Loan processing time gets cut.

3.  Concentrate on property search: If you have a clear picture on the amount that a bank will lend, you can arrange the remaining amount from your own sources. This allows you to lock-on to a property of your choice.

4.  Builder’s trust: Knowing that you have a loan sanctioned, builders are more likely to take you seriously and may offer discounts.

5.  Discounted rates: Some banks offer a discount on the interest on pre-approved loans.

SEE ALSO: Why Should You Avail A Home Loan?

Drawbacks of pre-approved loans:

1.  Pre-approval tenure: You will have to decide on a house that meets your expectations within 6 months. Some banks may have a tighter deadline. If you can’t lock-on the house within the deadline, the loan agreement gets cancelled.

2.  Processing fees: If the loan gets cancelled because you couldn’t find a property, you’ll have to get it approved again. This means you’ll have to pay the processing fees too.

3.  Loan amount: Banks consider your repaying capacity based on the interest rates prevailing when the loan is pre-approved. But, interest rates may fluctuate in the pre-approval tenure. Hence, your eligible loan amount may also change.

4.  No guarantee: A pre-approved loan can be withdrawn by the bank if they do not find the property satisfactory.

Tips to apply for a home loan after 45:

If you’re young, preferably in 20s or 30s and earning well, availing a Home Loan is easy. The problem arises if you’re in late 40s as you approach retirement. You’ll have greater responsibilities in life, like saving for retirement, meeting children’s higher education/marriage and so on. If you avail a Home Loan, then you'll have to pay Home Loan EMIs too.

Banks prefer not to sanction Home Loans, if the tenure goes beyond the retirement age. What if you default or miss repayments? You can still avail a Home Loan provided you make certain adjustments:

1.  High income: You either should be working in a great company or at least earning well. You should have a stable job and income. This will assure the bank that you’re in a position to repay the loan.

2.  High EMIs: You’ll have to accept the bank’s demand on higher EMIs. As loan tenure is short; EMIs will be high.

3.  Other loans: If you have other loans and credit card bills to attend to and are still aspiring to avail a Home Loan, then it is as good as being rejected. You’ll do better by repaying the other dues first.

4.  CIBIL score: It is very clear that if you don’t have a good CIBIL Score (750 or above), ication will be rejected.

5.  Joint home loan: Applying for a joint home loan with your earning spouse, increases the ances of  getting the loan sanctioned.

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