I saw those 'on demand' heaters at a home renno show, and the dealer told me that it would not be suitable for untreated water (high calcium, magnesium, iron) because it would clog up with deposits too quickly. I guess you found this out the hard way. Too bad the dealer wasn't more up-front with you.
You could put in a small hot water tank-type heater. Put a switch on it, so you only turn on the elements when you want hot water. It should last quite a few years, and only turning on the elements occasionally will certainly save electricity. The hot water heater in my house lasted 38 years! I do not soften or treat the water.