Precautions to safeguard your home loan
Precautions to safeguard your home loan
Taking a home loan is agreeing to enter into a long term commitment for which one needs not just financial but physical and emotional preparedness to service the loan over a period of 10-20 years. As much you feel prepared to commit to long term debt repayment, there is no saying when life throws a curveball at you and an unfortunate mishap leads to your demise or brings your regular cash flows to a grinding halt.
As morbid as it sounds, you have to take such possibilities into consideration, and safeguard your family from having to bear the burden of the home loan after your demise, or in the event that your regular cash flows are not adequate to meet your home loan commitment. Here are a few things you can do to protect your home loan and ensure that repayment is on schedule.
Opt for an insurance cover against the loan
Some lenders insist on an insurance coverage against your mortgage, to protect your liability. Most commonly, a home loan protection plan is likely to be offered to you that offers a risk cover equal to the quantum of loan that you have opted for. You can also opt for a term cover to protect your loan commitment.
Let us look at the difference between the two.
HLPP
You opt for a home loan of Rs 25 lakhs for 20 years. An HLPP for a sum assured of Rs 25 lakhs will cost approximately Rs 86,325. In a year’s time, your loan liability is down to Rs 20.5 lakhs. In case of your demise at this stage, the insurer will pay off your bank your outstanding amount.
Term cover
A term cover is more beneficial for the survivors of the policyholder. Here’s why. If we were to consider the same example of a home loan of Rs 25 lakhs for 20 years, where your outstanding balance (Rs 20.5 lakhs) is paid off to the lender and your family gets access to the remaining Rs 4.5 lakhs as well. A term plan is also more convenient in terms of premium payment, as unlike an HLPP, you are not required to make an upfront payment and can make periodic repayments like a regular insurance plan.
Depending on your financial situation and the comfort of repayment, you can opt for either option to protect your home loan.
Build a contingency fund
Apart from opting for an insurance cover that safeguards your loan commitment, it is also advisable to prepare for exigencies while making a repayment each month through EMIs. When you have a major repayment obligation such as a home loan, it is wise to build an emergency fund that takes care of at least 6 months of your expenses inclusive of your home loan. You can consider investing in small amounts in liquid funds in order to get better returns rather than letting your money lie idle in a savings account.
By taking these simple yet crucial steps to safeguard your home loan commitment, you can ensure the repayment of your mortgage is taken care of, no matter what the circumstances are. Regular repayment for the long term, will also help you build a credible track record and a high CIBIL score. A high CIBIL score will come to your aid as and when you are in need of any other line of credit.
