Excluded from benefits

To avoid disappointment, it is imperative to read the fine print before jumping to conclusions when banks declare a cut in home loan rates, writes Arnav Pandya.

Most investors are interested in the various developments that take place in the personal finance world. The idea behind this is to see how they have benefited or will benefit from the changes that are taking place on various issues. But this often results in disappointment because the benefits, when they come, are actually not applicable to them at all.

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There are quite a few cases of this happening in real life and hence whenever there is a financial development, it has to be considered from the point of view of the existing position of the investor. Consider a few examples of the actual situation that people will be faced with and then the picture will become a bit clearer.

The first common example where one witnesses such a situation is the home loan arena. Currently, home loan takers are watching with bated breath for the interest rates to come down on these loans. With the softening of the overall rates they are looking to see that their floating rate goes down and this provides them with some benefit in the form of a lower number of EMI. There are cases where a housing finance company announces a home loan rate cut but this is applicable only for new home loans taken during the specified period. In this case only if a person is taking a new home loan will he benefit. Otherwise, the position for the existing loan takers remains the same as before and they continue with the old rates.

Changing view
• Changes in the personal finance arena are eagerly awaited
• In many cases the benefit is not applicable to a large number of people
• The benefits are for new customers only
• Housing loan rate cuts for new customers are an example
• Change in insurance premium is also of the same nature

A similar situation will arise for those who have already taken insurance. There is a review of the mortality tables by the insurance company after a certain point of time. Mortality tables are used to predict the probability of a person dying before a certain age and hence will impact the premium charged from the consumer. This can often lead to a reworking of the entire situation whereby the insurance premium could come down for several people if the mortality tables are revised. This is good news but there is a catch, as this will be applicable for only those who will take insurance policies in the time period going forward.

Existing policyholders have their premium already fixed for the duration of their policy and hence they are unlikely to witness a change in the amount that they already pay. The real benefit comes for all those who are going to take an insurance policy because they will be able to benefit from the situation where the premium payable by them could be lower than what they would have paid at an earlier stage.

The individual thus has to make sense out of the news flowing in because in many cases they could remain away from the benefit that would normally be visible to all.