People tell me freedom is living life without restraints. However, if I see around then almost everyone has given up some degree of their freedom. Many have even forced others to give up their freedom (under the pretext of option or by persuasion)
Cavemen have given up their freedom for civilization, law and order. Marriage constraints our personal life. Home mortgage EMI takes away our financial freedom, employment bonds/service contracts takes away our professional freedom. Why is it that everyone talks so much of freedom but they part with it so easily? The moment we plan, commit, agree to something we tie ourselves up and give up our freedom.
Hence I think freedom is ability to choose one’s constraints.
Most home loans in India have a covenant that restricts the number of times a person can make a pre-payment (usually 4 times a year) and the minimum amount. Also some of the banks charge a prepayment penalty. However if you read the fine print, most banks are relatively more flexible when it comes to changing the EMI (Equated Monthly Installment) amount.
Using this loophole, one can minimize the pre-payment penalty/charges by calling the bank one month to increase the EMI and revert it back to the old levels next month. Chances are that you would be able to stretch a little and continue paying that higher EMI for a few extra months. Hence reducing your interest expenses.
When it comes to debt, don’t ignore any processing charges, penalties or fines. It might put you in a debt trap.
A 1M (10Lakh) INR loan for 15 years period at 8.75% has an EMI of 9,800/-
If you prepay 1EMI (9,800 on the first day), it will save you from paying about 3.5 EMIs 15 years later which is a net saving on 24,500/- in interest expense alone.
Please note that this calculation assumes that you would continue to pay the same EMI even though now your loan outstanding is (10Lakhs – 9,800/-)
For most people, the Home Loan EMI is the single largest monthly expense. With the interest rates getting revised, often the wifes are forced to continue employment just to be able to run the household. Hence Home Loan Insurance is a very good scheme. It allows your family to have a house over their head even after you are gone.
However, I would advise people to go for term insurance rather than go for house loan insurance. Reasons
1) Term insurance cover remains constant for the entire period.. While after each EMI, the housing loan cover reduces. Although the insurance companies claim that they take care of this difference by reducing the premium amount, but if you do the maths and take into account that the insurance premium increases as you age, you will find that the deal is not good enough.
2) Interest Rate fluctuation: Rise of even 0.5% of interest rate would increase the EMI term for additional year, however this insurance does not give you any insurance cover for those EMI. On the other hand if the interest rate falls and the period of the loan gets reduced, the refund from the insurance premium is minuscule. (thanks to their service charges.)
3) Foreclosure: Most of us agree that even though we take a housing loan for 15-20 years, there is always a chance that we will have to foreclose… Reason could be because you have made enough money to pay of the loan dues and save on interest, or because you want to sell the house (move to a different city/bigger place) or you might to switch the loan from one bank to another… In event of foreclosure, the home loan insurance is void.
4) Full fledged term insurance gives you an opportunity to have all the additional extra benefits like disability, critical illness etc… which are not covered in the home insurance.
Hence, although I strongly recommend a person to go for a insurance the moment he takes up a long term financial commitment like housing loan (or marrying and promise to pay the wife’s shopping bills), its best to make it a plain vanilla term insurance rather than an exotic scheme like this. This scheme might look cheaper on the first glance, but due to limited benefits, it only reduces the flexibility.