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Ramalingam Kalirajan |10879 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on May 15, 2025

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by Gandreti on May 13, 2025

Hi , I have Home loan of Around 56 Lakhs. I'm paying an EMI of 40k per month which includes term insurance. After repo rate, I didn't opt- "Change in tenure" nor " Change in EMI". My interest rate was earlier 8.50% ..after change in repo rate it was 8.25%. I'm still paying same 40k per month. are they any disadvantages or advantages?

Ans: You are thoughtful and sincere in managing your finances. Paying a Rs. 56 lakh home loan with Rs. 40,000 EMI needs strong planning. You are doing a good job by not missing your EMI. Let us now analyse your home loan repayment in detail. This will help you understand the true financial impact. A 360-degree approach is used to evaluate your decision.

Loan Situation: Clear and Well-Structured

Your home loan is Rs. 56 lakhs. EMI is Rs. 40,000 per month.

Your earlier rate of interest was 8.50%. It is now reduced to 8.25%.

You have not changed your EMI amount or loan tenure after rate change.

Your EMI includes term insurance premium. That is a safe and responsible approach.

This means your monthly EMI has remained the same after repo rate reduction.

But the interest component of the EMI has now become slightly lower.

Hence, more portion of your EMI now goes towards principal repayment.

This is a good situation. But let us go deeper to see hidden advantages and disadvantages.

Not Opting for Tenure Reduction – Benefits and Risks

When interest rates fall, banks may give two options:

Either reduce EMI amount or reduce loan tenure.

You have not chosen either. That means your EMI is still Rs. 40,000.

Since rate has dropped to 8.25%, interest portion in EMI is less.

This means, your principal repayment is now a little faster.

Without doing anything, your loan may get closed a few months earlier.

That is the hidden benefit of not reducing EMI or changing tenure.

This approach will help reduce the total interest paid over the loan life.

Hence, you may become loan-free earlier than expected.

This works better than reducing EMI amount.

Reducing EMI slows down principal repayment.

That increases your total interest cost over years.

So, keeping EMI same after rate cut is smart and beneficial.

Missed Opportunity: Tenure Reduction Confirmation

Still, you should confirm with the bank whether tenure has reduced or not.

Sometimes banks keep the tenure unchanged unless you give written request.

In that case, you will continue for same duration, even with lower interest.

So, extra principal goes as prepayment or buffer, not as actual tenure cut.

To benefit fully, ask for a revised amortisation schedule.

That will confirm whether tenure is shortened or same.

If same, then request bank to reduce tenure officially.

This will ensure loan closure earlier and less total interest paid.

Interest Rate Dynamics: Small Reduction, Moderate Impact

Your interest rate drop is from 8.50% to 8.25%.

It is a 0.25% reduction only.

On Rs. 56 lakh loan, it saves some interest over time.

But the savings are not very large.

However, with higher EMI, these savings accumulate better.

Over 15 to 20 years, even 0.25% can save lakhs.

You must continue to monitor rate changes going forward.

Any further drop in repo rate must be checked with the lender.

Always keep your loan in floating interest rate structure.

This ensures automatic adjustment with repo-linked rates.

Interest Rate Review with Bank – Important Step

Visit your bank branch or call customer care.

Request latest interest rate applicable on your loan.

Ask for revised amortisation schedule with current rate.

See whether tenure has reduced automatically or not.

If not, ask them to recalculate with same EMI and reduced tenure.

This way, you gain full benefit of repo rate change.

Term Insurance in EMI – Things to Watch

You mentioned that your EMI includes term insurance.

Many banks give group term plans with home loans.

These are sometimes bundled into EMI amount.

You must review the terms of this cover.

Check if this is a one-time premium or annual charge.

See whether this term insurance covers only home loan or full life cover.

Also check if it is reducing cover or fixed cover.

You can also compare this with personal term plans bought separately.

A regular term insurance bought from MFD with CFP advice is often cheaper.

Explore Prepayment Opportunities

You are already showing financial awareness.

If possible, make small prepayments once or twice a year.

Even Rs. 50,000 per year prepayment can reduce your tenure by many months.

Prepayments early in loan term save the most interest.

Check whether your bank charges penalty on prepayment.

If not, use annual bonuses or surplus income for this.

Ensure all prepayments are recorded as principal reduction.

Ask bank for acknowledgement and revised schedule.

Avoid Real Estate as Investment

You are already repaying a home loan. That is your own property.

Do not take more loans to buy property as investment.

Real estate is illiquid and high-maintenance.

It also gives low rental yield. Capital appreciation is uncertain.

Instead of buying more property, invest in long-term financial instruments.

Build Emergency Fund and Continue SIPs

Keep emergency funds equal to at least 6 months EMI + 6 months expenses.

It should be in liquid funds or savings account.

Continue your mutual fund SIPs without break.

Avoid index funds. They just copy the market and lack professional fund manager strategy.

Actively managed funds by professional fund managers give better performance.

Choose regular plans with the help of MFD with CFP credentials.

Avoid direct plans. They look cheaper, but there is no personalised advice.

Wrong scheme selection in direct plans may hurt your long-term returns.

Avoid New Debts and Personal Loans

Avoid taking new personal loans or credit card EMIs.

They come with high interest rates.

Even small EMIs affect your home loan affordability.

Reduce liabilities and focus on wealth building.

LIC Policy Review – Suggestion to Reassess

If you hold traditional LIC endowment plans or ULIPs, review them closely.

These offer low returns, usually 4% to 5%.

Surrender such policies if they are investment cum insurance.

Reinvest maturity or surrender proceeds into mutual funds.

Take a pure term insurance separately.

Do this under the guidance of a Certified Financial Planner.

Long-Term Focus – Freedom from Loan

Your final goal should be to become loan-free by age 50 or earlier.

That gives you financial freedom and mental peace.

Plan all financial moves keeping this goal in mind.

Avoid lifestyle inflation or impulse spends.

Every extra rupee saved today will save more interest tomorrow.

Aim for financial discipline, not just financial products.

Finally

You are already managing the loan responsibly. That itself is great.

Keeping EMI same and letting tenure reduce works in your favour.

Confirm with bank about tenure reduction officially.

Avoid new loans and increase prepayments slowly.

Continue SIPs in regular funds through MFD and Certified Financial Planner.

Reassess old LIC investment plans if any.

Set your goal to be debt-free before retirement.

Financial planning is not only about returns. It is also about control.

You are on the right path. Just fine-tune your steps.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.