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Synopsis: When securing a home loan, banks often offer home loan insurance plans to protect the loan disbursement amount. While these plans can be beneficial, it's essential to thoroughly understand their terms and implications. Home loan insurance, though protecting against default in the event of the borrower's death, can be more expensive than term loans and may not offer flexibility if the lender is switched. Adhil Shetty, CEO of BankBazaar.com, clarifies that purchasing these plans is not mandatory, and borrowers should consider cost-effective alternatives like term insurance. Strategies to reduce Equated Monthly Installments (EMIs) include opting for shorter tenors and smaller spreads on repo-linked loans.
When you secure a home loan, banks typically provide a sanction letter and often offer home loan insurance plans designed to safeguard the loan disbursement amount. However, it’s crucial to understand the terms of this insurance, as it can significantly impact your financial obligations and increase your overall income outgo.
Home loan insurance acts as a guard against the risk of default on a home loan in the event of the borrower's death. If such an unfortunate event occurs during the loan tenure, the insurance company settles any outstanding amount on the home loan with the lender. Nevertheless, home loan insurance products can be more expensive than term loans. Additionally, single premium policies bundled with your home loan might not allow you to port your insurance if you switch lenders.
Moreover, the policy tenor usually matches the home loan's duration. However, if the loan tenor extends due to an interest rate hike, the insurance cover may not fully cover the loan. Consequently, the borrower’s nominee might have to pay extra if the borrower passes away.
Adhil Shetty, CEO of BankBazaar.com, states, "Purchasing home loan protection plans is not a legal requirement. Neither the law nor regulatory bodies like the Reserve Bank of India or the Insurance Regulatory and Development Authority of India mandate the purchase of such plans with a home loan. The decision to buy an insurance plan is entirely up to the borrower. No one can compel you to make this purchase."
Shetty adds, "A term policy might provide the borrower with cost-effective insurance against all liabilities, including home loans. So, their family would be better equipped to face all financial eventualities with term insurance."
Tips to Reduce Equated Monthly Installments (EMIs)
Opt for a Shorter Tenor: Choosing a shorter loan tenor means paying higher EMIs, but it also reduces the overall interest outflow. For instance, the total interest on a ?40 lakh loan for 20 years at 8.5% is approximately ?43.3 lakh, compared to ?31 lakh for a 15-year loan, a difference of ?12.3 lakh. The increase in EMI is less than ?5,000 per month. The same principle applies when you prepay your loan—faster principal repayment reduces accruing interest.
Opt for a Smaller Spread: In the case of a repo-linked loan, your interest rate is directly pegged to the repo rate, with the bank charging a Spread on top of it to compute the lending rate. "The smaller the spread on the repo, the lower your interest rate. Many banks do not change the spread for the loan tenor, meaning that changes in repo rates do not affect your spread. Over the last few years, spreads on loans have decreased significantly, from 3-3.5% in 2020 to as low as 1.9% currently. If you have a high spread, consider refinancing your loan to reduce it," explains Shetty.
