It’s a dream to buy your new house after saving hard earned money. Also, it is not uncommon to take a home loan to buy your dream house. We will see Home Loan Calculation Method and other important factors you should know in this article.
Home Loan Calculation Method is simple – your EMI is calculated based on the Loan Amount, Interest Rate and tenure of your loan that is selected. This EMI (Equated monthly installment) consists of 2 components – Principal Amount and Interest Amount. The Interest amount is high initially and decreases with tenure of loan, where as principal amount is low initially and increases with tenure. You can make home loan prepayments to save home loan interest.
Let us see all these factors one at a time, so read on.
Home Loan Calculation Method Video
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Above video helps you to understand the basics of your existing home loan. It also helps you to understand important factors if you are planning to take a new home loan.
EMI components of Home Loan
As seen in above video, there are 2 components in Home Loan EMI that you pay every month:
- Principal Amount – This amount is what you pay back against the amount you have taken as loan. Every month’s principal amount from EMI will be reduced from your total outstanding balance after every EMI you pay
- Interest Amount – This is the interest amount that goes to the banks as their profits for lending you the loan amount. Every month’s interest amount from EMI is calculated as per the remaining outstanding balance in your home loan
For example, if loan amount is Rs. 30,00,000, tenure is 10 Years and interest rate is 10%, below are the EMI, principal and interest components for mentioned loan details for first 5 months:
| Months | EMI | Principal Amount | Interest Amount | Balance |
|---|---|---|---|---|
| 1 | ₹ 39,645 | ₹ 14,645 | ₹ 25,000 | ₹ 30,00,000 |
| 2 | ₹ 39,645 | ₹ 14,767 | ₹ 24,878 | ₹ 29,85,354 |
| 3 | ₹ 39,645 | ₹ 14,890 | ₹ 24,755 | ₹ 29,70,587 |
| 4 | ₹ 39,645 | ₹ 15,014 | ₹ 24,631 | ₹ 29,55,697 |
| 5 | ₹ 39,645 | ₹ 15,139 | ₹ 24,506 | ₹ 29,40,682 |
As seen above, for first month the Principal amount in EMI is ₹ 14,645 and Interest amount is ₹ 25,000. EMI is ₹ 39,645 which you can find out by using below home loan calculator.
For first month interest calculation, below are the steps:
- Annual interest rate of 10% is divided by 12 to get monthly interest rate = 10% / 12 = 0.83%
- This interest rate is multiple by balance in first month and divided by 100 to get interest amount = 0.83% * ₹ 30,00,000 / 100 = ₹ 25,000
- Now this interest amount is subtracted from EMI to get principal amount = ₹ 39,645 – ₹ 25,000 = ₹ 14,645
- Ans this process is repeated every month on after reducing the balance based on the principal amount paid every month
As seen, the principal amount is increasing with time and interest amount is decreasing with time.
Home Loan EMI Calculator
You can use this home loan EMI calculator to know the EMI and total interest of your home loan:
Fixed vs Floating Interest Rates
There are 2 types of interest rates in home loan:
- Fixed Interest Rate – The Interest rate is fixed in this case throughout the tenure of your home loan. This will be 2% to 3% higher than the current floating interest rate on home loans. It doesn’t matter what new policy is announced or existing policy is updated, the interest rate will be fixed
- Floating interest Rate – The interest rate of new home loans are usually floating interest rate, and they change with time due to RBI repo rate changes or other factors. With changing interest rate, usually the EMI component is kept same but your loan tenure changes.
Why Home Loan Tenure Increase in Floating rate home loans?
In floating interest rate home loans, when interest rate increases, the interest portion on your remaining home loan balance will also increase, but since bank cannot increase the EMI amount you pay every month, you pay extra interest amount with the help of increased tenure.
ALSO READ: Why Home Loan Tenure Increases with Calculator
Impact of High Interest Rate
When you want to opt for a home loan, you should go for low interest rates home loan.
High interest rate meaning you have to pay more interest amount throughout the loan tenure – more interest amounts in every month’s EMI.
Let us compare the interest amounts you have to pay with example in below table:
| Items | 9% Interest Rate | 10% Interest Rate | 11% Interest Rate |
|---|---|---|---|
| Loan Amount | Rs. 30,00,000 | Rs. 30,00,000 | Rs. 30,00,000 |
| Tenure | 10 Years | 10 Years | 10 Years |
| Interest Rate | 9% | 10% | 11% |
| EMI | Rs. 38,003 | Rs. 39,645 | Rs. 41,325 |
| Total Interest Amount | Rs. 15,60,328 | Rs. 17,57,427 | Rs. 19,59,000 |
As seen in above table, the interest amount is increasing with the increase in interest rates. Also, it is noticeable that the EMIs are also increasing with the increase in interest rates.
So it is best to opt for home loans from banks providing at low interest rates to keep your EMI and interest amounts to be paid low.
ALSO READ: 7 Home Loan Mistakes you should avoid
Interest Rate Change Effect
When interest rate changes in floating interest rate home loans, automatically your tenure is increased, since EMI cannot be increased without your consent.
Watch below video to understand interest rate change effect in Floating rate home loan:
Home Loan Prepayment
It is not true that the total interest amount you are supposed to pay at the start of the home loan, needs to be paid by you in full.
During your home loan tenure, you can make some home loan prepayments to save the loan interest amount you have to pay.
Home Loan Prepayment or part payment is a way to pay some extra amount in your loan account to reduce remaining principal balance. This helps in reducing the interest component in your EMI that you pay every month.
For example, in above table of 10% interest rate for Rs. 30 Lakh loan for 10 years, you need to pay total interest amount of Rs. 17,57,427 initially at the start of the loan. But if you make prepayment of Rs. 50,000 after your 6th EMI (after half year of loan), your total interest amount payout will be Rs. 16,79,860, thus saving Rs. 77,566 of interest amount throughout the loan tenure.
This is how home loan prepayment can help you in saving loan interest amount:
Now home loan prepayments need planning to save some amount of money to be paid in your loan account. You can open RD (Recurring Deposit) to save some amount every 6 month and make home loan prepayments.
Download Home Loan EMI and Prepayment Excel Calculator
Click below button to download Home Loan EMI and Prepayment Excel calculator:
Conclusion
So home loan EMI can be easily calculated using the calculator displayed above. Also, your every month EMI consists of 2 components – Principal amount and Interest amount.
The principal amount is low initially and increases with time, where as the interest amount is high initially and decreases with time. That is why maximum interest amount is taken from you during the initial phases of your home loan.
Best way to save loan interest amounts is to make home loan prepayments. And making these prepayments during the initial phases of the loan can help you save more interest amounts throughout the loan tenure.
Some more Reading:
- Buy or Rent a House with Excel Calculator
- Home Loan Tax Benefits
- Types of Life Insurance in India
- Rs. 5000 SIP Investments in Sensex for last 25 Years
Frequently Asked Questions
What is the EMI for 20 lakh home loan?
Using the Home Loan Calculator, for 20 lakh home loan with 9% interest rate and for 10 years tenure, your EMI amount will be Rs. 25,335
What is the EMI for 40 lakh home loan?
For 40 Lakh home loan with 9% interest rate and 10 years tenure, your EMI will be Rs. 50,670. In case not affordable, this EMI can be reduced if you slightly increase the tenure by 2-3 years. So for 12 years tenure for same loan and interest rate, your EMI will be Rs. 45,521.
How much EMI is safe for home loan?
It is best to have maximum of half of your monthly income to be assigned towards home loan payment. So if your monthly income is Rs. 50,000, your total loan EMIs must be maximum Rs. 25,000 or low, not more than this amount to cover your other household expenses as well.
Can I get 90 percent home loan?
Yes maximum of 90 percent home loan can be taken if you home loan amount is within Rs. 30 Lakh.
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