Understanding Home Loan Interest Rates and EMI Calculation in India

EMIs or equated monthly instalments are fixed monthly payouts that go towards repaying your home loan. The payment comprises two components – the principal and the interest – spanning the entire loan period. Comprehending the terms and conditions of the EMI will help you take stock of the repayment situation and manage your budget accordingly.

The interest rate on a home loan is a critical factor in calculating the overall cost of the loan. It is the percentage charged on the principal amount borrowed, which denotes the borrowing cost. The EMI amount rises and falls with fluctuations in the rate of interest in a home loan. The interest rate could be fixed or floating. The former doesn’t change throughout the loan tenure, while a floating rate is linked to an external benchmark rate, swaying in sync with RBI’s changes in repo rate.

Principal & interest payment through EMIs

Each EMI repays a portion of the amount borrowed (the principal), plus the interest due on the outstanding principal. The ratio of repayment of the principal and the interest changes during the tenure. The initial EMIs account more for paying the interest and less for repaying the principal amount. EMIs at the later stages are more focused in repayment of the principal amount.

Factors affecting EMI on home loan:

• Interest rate: A lower interest rate translates into smaller monthly payouts, whereas a higher rate results in larger EMIs.
• Duration of loan: When the loan tenure is shorter, the EMI amount increases, but the overall interest paid goes down. Conversely, when you borrow for a longer tenure, your EMI goes down, but you end up paying more overall interest.
• Amount of borrowing: A higher amount of borrowing will entail a larger EMI, and a lower amount a lesser monthly payout.
• Your credit score: If you have a higher credit score, you can secure a lower rate of interest from the lender, which slashes your EMI amount.

You need to remember that the interest rate for a home loan is compounded interest, as opposed to simple interest. This means, you will not be paying interest on the principal amount alone, but on the principal amount together with the interest accrued. This interest rate will determine your total cost of borrowing.

What is the formula to calculate home loan interest rate?

The manual formula is as follows:

Interest = (Principal Amount × Rate of Interest × Time) / 100

What are the advantages of calculating home loan EMIs?

• Proper financial planning: When you know your EMI amount and duration of your loan by prior calculation, it enables you to manage your finances better and make sure you can afford the EMI with your present income. You can decide on the affordability of a particular home accordingly, averting anxiety.
• Compare loan offers: By being able to calculate your EMI on your own using the manual formula, you can make a comparative analysis of loan offers from a clutch of lenders. You can figure out the total repayment amount and settle for the most cost-effective option that suits your budget.
• Save on interest: When you account for various EMI options, you can figure out the impact of different interest rates on your repayment of loan. By comparing EMIs for varying interest rates, you can calculate long-term interest savings.
• Planning prepayment: Deducing EMIs on your own helps in planning the prepayment of your house loan. When you can fathom the repayment schedule, it allows you to figure out when’s the right time to make additional payments to reduce the tenure. This helps in saving interest and can make you a debt-free home owner.