What Happens to a Property Loan or Loan Against Property if the Borrower Passes Away?

An important but less frequently asked question among property loan borrowers is, what happens to the loan if the borrower passes away? While it’s not a pleasant topic to think about, it is certainly, a highly pertinent one. The untimely demise of a borrower not only leads to immense personal loss to the family but can also create significant financial challenges.

If the deceased borrower had a property loan, the financial complications can increase, especially if he/ she was the sole earning member of the family. Understandably, questions like “Who will repay the property loan?”, “What if the family is not in a position to afford the property loan EMI?”, “Could the lender take possession of the property” and more, can be overwhelming, thereby making it crucial to understand how these situations are typically handled.

• What happens if a borrower passes away untimely?

If a property loan borrower passes away during the loan tenure, the lender's first step will be to check whether the borrower had availed any insurance at the time of loan application. Many lenders, such as SMFG India Credit, gives its borrowers’ the choice to voluntarily opt-in for insurance policies from a bouquet of various product offerings by reputed insurance partners**, to take care of repayment in similar situations. The borrower may then choose to avail of these policies, as per their choice. Depending on the terms of the insurance policy opted there-under, the family may be eligible to claim either part or lump sum amount from the insurance partner, which can be used to repay the property loan partially or fully. This allows the family members of the deceased borrower to continue living in their property.

If no insurance policy was in place, the next step is to check for co-applicants. If the loan was jointly held, then the co-applicant will have the responsibility to repay the outstanding amount. In case the co-applicant is unable to continue repaying the loan, the lenders would reach out to the guarantors, or family members, or legal heirs. In such cases, the financers may assist the family of the deceased by restructuring the loan terms to ease the repayment burden, if needed.

However, if no one can take over the loan repayment under any circumstances, the lender may have no option, but to repossess and sell the property after providing a reasonable notice period as per regulatory guidelines. The lender is compelled to ultimately sell the property, apply the sale proceeds towards the outstanding dues, and any proceeds over the outstanding dues would be transferred to the legal heirs.

• Does “Credit Life Insurance” (CLI) help after a borrower’s death?

Under property loans, SMFG India Credit offers “Credit Life Insurance” as one of the options to customers, which usually covers the outstanding amount as of the date of death (as mentioned in the “Certificate of Insurance” (COI)). Credit Life Insurance provides financial assistance in unforeseen circumstances such as death. Availing of this insurance is completely voluntary and optional for the customers.

If the deceased borrower had opted for Credit Life Insurance, and the Insurance company receives the death claim intimation along with the complete set of documents, the Insurance company will pay to the lender, the lower of (1) the Death Benefit as of the date of death, as mentioned in the COI during policy issuance; or (2) the loan amount outstanding as on date of death; and pay the balance claim amount, if any, to the nominee.

**SMICC is a registered Corporate Agent (CA0098) with Insurance Regulatory and Development Authority of India (IRDAI)