Term Of The Week: What Is Mortgage Guarantee?

By BankBazaar | January 2, 2017

Term Of The Week: What Is Mortgage Guarantee?

A popular product in developed nations, mortgage guarantee is a very new concept in India. Mortgage guarantee aka mortgage insurance, is an Insurance product that helps cover the risk of default on a Home Loan. This is a cover provided to lending institutions such as banks and housing finance companies. It mainly covers the risk of default in case the home owner is incapacitated, has a terminal illness or dies.

Additional Reading: Things To Do When Unable To Pay Your Home Loan

In the United States, Canada and other developed nations, mortgage insurance is mandatory for certain types of Home Loans. For instance, in Canada, banks need to have mortgage insurance for homes that have been financed with less than 25% down-payment.

However, in India, this product was introduced only a couple of years ago. The India Mortgage Guarantee Corporation (IMGC) provides this cover to finance firms in the country. Started in June 2012, it is a joint venture between the International Finance Corporation (IFC), Asian Development Bank and National Housing Board.

Additional Reading: Let’s Talk Mortgage Loans

How is it relevant to you?

A mortgage insurance backed Home Loan will essentially give a higher Loan To Value (LTV). In simple words, this cover allows you to get higher financing for your home. Since lenders are covered for default risk, they are willing to provide higher financing. This means that your down-payment will also be lower.

Typically, in a mortgage guarantee both the principal as well as the interest on your Home Loan will be covered. The fee for this product is based on the amount of coverage provided. The cost of this insurance is added to your Home Loan and you need to repay the same along with your Loan.

Additional Reading: Understanding Loan-To-Value Now!

One such Loan in India is the ICICI Bank Extra Home Loan. This is India’s first Home Loan scheme with mortgage guarantee for individuals. Launched in August last year, the scheme was started in association with IMGC and allows you to get higher financing along with higher tenure options. Through this scheme, you could increase your Loan amount by up to 20%.

The bank also allows you to extend the tenure of your Loan until you reach 67 years of age. Typically Home Loan tenures stop at retirement age, which is 60. Since this is a mortgage backed Home Loan scheme, the bank is able to extend the tenure. With higher financing and extended tenure, your down-payments will reduce considerably.

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This scheme is mainly aimed at those who are looking for affordable housing. The bank has divided the scheme into three parts based on customer profile.

  • One is for the middle aged, salaried customer. This is aimed at customers who are 48 years old and below, the repayment schedule will be extended to 65 years for these customers.
  • The second option is for the young and salaried customer. These customers need to be 37 years old or below and can avail a repayment period of 30 years. The tenure can be extended until they reach 67 years of age.
  • The third option is for the self-employed. Here the customer’s seasonality of business and income flow will be considered for granting Loans.

Additional Reading: All You Need To Know About Affordable Housing

How is this different from Home Insurance?

Home Insurance is a cover for possible damages to your home due to fire, theft or other calamities. This doesn’t include any default on your part. Home Insurance will also cover damages to your belongings.

Additional Reading: All About Home Insurance

There are different types of Home Insurance. Some give you comprehensive coverage, which includes all kinds of risks to your home. Then there is the basic option where you can get a cover for common types of hazards. You can also choose to have total coverage for your home plus a basic cover for your belongings. This is a separate policy that needs to be taken in addition to your Home Loan.

So, Home Insurance does not change your Home Loan in any way, but helps protect your Home against damages and other calamities.

Additional Reading: How Critical Is Home Insurance?

Here’s a tip. In case you find that you are not eligible for a mortgage backed Home Loan, try applying for a regular Home loan along with a co-applicant. Your eligibility will improve and you can get a higher Loan amount. But, as always, compare across different lenders before zeroing in on a Home Loan.

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Category: Home Loans

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