How to calculate Home loan interest

A home loan is offered to individuals who wish to buy an apartment or other residential property. A home loan is a secured loan meaning that the bank/finance company extends credit to the borrower with the home (or property) as collateral to safeguard against default. Once the borrower pays back the loan amount in full, including interest, the ownership of the property is fully transferred to the borrower’s name.

The cost of borrowing money from a lender is known as interest.  The repayment amount that is due over the entire loan period includes the original loan amount (known as principal) and the interest

What is an EMI?

In simple terms, an EMI (Equated Monthly Instalment) is the amount a borrower has to pay the lender every month to pay off the loan. EMI payments are made to a lender every month generally on a fixed date, till the outstanding amount is completely paid off. For home loans, the repayment period is generally long given the size of the loan amount and can stretch up to 30 years.

How is the EMI calculated?

The EMI is calculated using a standard mathematical formula. This formula takes into account the loan amount, the tenure (loan period) and the interest rate charged. You can calculate the interest you need to pay using a simple calculator at home. Alternatively, several banks and housing finance companies offer an EMI calculator tool on their website which is simple to use. All you have to do is to input the numbers for the loan amount, period and interest rate and you will find out your monthly EMI payment. A Loan Amortisation table will further break down your monthly EMI into the principal and interest components and will give you an idea of exactly how much interest you are paying over the entire period of the loan. (See below for a sample Loan Amortisation Schedule.)

What is the interest rate for a home loan?

Each bank has its own interest rate which can vary based on the customer’s credit profile. There are two main kinds of interest rates that apply to home loans:

Fixed rate: If you opt for a fixed rate loan, then a fixed rate of interest is charged throughout the loan tenure. This means you will pay a constant EMI amount for your entire loan tenure. With this kind of interest rate, you have a fixed monthly outflow which helps with personal budgeting.  During the initial stages of repayment, your EMI will contain a larger interest component, while during the later years you will be repaying the principal.

Floating rate:Floating interest rates vary with current market lending rates. Generally, you would choose a floating interest rate if you feel that interest rates are going to go down in the future and do not want to be tied to the high current interest rate.  The EMI amount you pay can change periodically according to the fluctuations in the interest rates in the market. However, keep in mind that many lenders will allow you to change from a floating to a fixed interest rate, on the payment of a fee.

How can I choose the best offer?

The best thing to do is to research the multitude of home loan products on the market and study what each has to offer. However, many people simply do not have the time to go through the complexities of finding out about home loans and the benefits and drawbacks of each of the offers on the market. In that case, you could approach a professional credit management company, like CreditMantri, to guide you through the process of finding out how much your home loan will cost and help you identify the most suitable loan available in the market depending on your needs and level of affordability.

Sample Amortisation Schedule

An amortisation table is useful for learning what your monthly EMI or annual outflow will be and what percentage of that outflow consists of interest repayment and principal repayment. You get a good idea of your repayment outflow over the entire loan tenure.

AMORTISATION TABLE

Below is a sample table for a loan taken on the following terms:

Principal – Rs. 50,00,000

Tenure – 20 years

Interest Rate – 9.5%

This table doesn’t seem right. You have only subtracted the principal for the ending balance, not interest plus principal. In year 1, after paying 4 lakhs as interest, the ending balance is still only 49 lakhs. Please redo the table correctly.

Also, you have written Month in Column 1, instead of year. I would have corrected it on my own, but since I am sending the article back to you, wanted to point it out. Please be careful about such things. We cannot afford to have any errors in our content.

Also, if it is an offsite article, like this one, make sure you add a mention of CreditMantri towards the end.

 Month Starting Balance Interest paid Principal paid Ending Balance 1 50,00,000 4,71,232 88,047 49,11,953 2 49,11,953 4,62,493 96,785 48,15,168 3 48,15,168 4,52,888 1,06,391 47,08,777 4 47,08,777 4,42,329 1,16,950 45,91,826 5 45,91,826 4,30,722 1,28,557 44,63,269 6 44,63,269 4,17,963 1,41,316 43,21,953 7 43,21,953 4,03,937 1,55,341 41,66,612 8 41,66,612 3,88,520 1,70,759 39,95,853 9 39,95,853 3,71,573 1,87,706 38,08,147 10 38,08,147 3,52,943 2,06,335 36,01,811 11 36,01,811 3,32,465 2,26,814 33,74,997 12 33,74,997 3,09,954 2,49,325 31,25,673 13 31,25,673 2,85,209 2,74,069 28,51,604 14 28,51,604 2,58,009 3,01,270 25,50,333 15 25,50,333 2,28,108 3,31,170 22,19,163 16 22,19,163 1,95,240 3,64,038 18,55,125 17 18,55,125 1,59,111 4,00,168 14,54,957 18 14,54,957 1,19,395 4,39,884 10,15,073 19 10,15,073 75,737 4,83,541 5,31,531 20 5,31,531 27,747 5,31,531 0