Taking on a home loan requires borrowers to repay funds within a stipulated period of time. Your ability to service the loan will depend on the payable EMIs thereby impacting loan affordability. However, figuring out how much you can afford might be tricky and require proper calculations. Based on the principal amount, interest rate, tenor and other factors, borrowers can estimate their monthly loan payment by using a home loan EMI calculator. Read on to crack the EMI interest calculation code. 

What Is a Home Loan?

A home loan or housing loan is a financial solution offered by banks and financial organisations to people who want to buy or build a property. Borrowers must fulfil certain requirements to be eligible for a loan and repay the funds, along with the applicable interest, during the selected tenor.

How to Calculate EMI Interest 

The main principal sum and interest rate that must be repaid over time are combined into your monthly installment. The EMI calculation formula is explained with an example:

If a borrower obtains a house loan of Rs. 10 lakh for 10 years at an annual interest rate of 7.2%, the payable EMI will be determined by applying the following formula:

EMI = P x R x (1+R)^N / [(1+R)^N-1]

Which denotes, 

• P as the principal loan amount of Rs. 10,000,00
• N as the loan tenor in months. So, 10 years = 10 x 12 = 120 months
• R as the interest rate per month [7.2/12/100] = 0.006

The EMI = 10,00,000 x 0.006 x (1 + 0.006)^120 / [(1 + 0.006)^120 – 1] 

= Rs. 11,714

Thus, you will have to pay an EMI of Rs. 11,714 every month. The total loan liability, in this case, stands at Rs. 14,05,702; of which Rs. 4,05,702 will be the net interest charged on the principal amount. To help you understand the exact payment plan, a loan amortisation schedule illustrates the breakdown of the interest and principal components. 

Factors That Influence Your EMI Amount 

The number and amount of EMI payouts will vary in certain instances. Here are the main considerations that may impact your loan EMI: 

The Big Three: Principal Amount, Interest Rate and Tenor

Your EMI will increase in proportion to the loan amount and interest rate that lending institutions charge. This figure may change according to your repayment tenor. A longer tenor will result in lower monthly installments and vice versa. Since the interest accrues over time, aim for a minimum tenor on the home loan to restrict credit costs. 

Interest Rates: Fixed or Variable

Lenders use the base lending rate or MCLR to calculate the variable interest rates. It is used as an internal benchmark to fix lending rates or floating interest rates. While EMIs will fluctuate with variations in the base rate, fixed-interest EMIs stay the same throughout the tenor.

Loan Prepayment and Foreclosure 

Borrowers can decrease the balance EMIs by foreclosing loans before the end of their tenor. You may close the loan by paying the outstanding sum in full or partially in installments. Extra fees and GST could apply to the lending rate.

Home Loan Down Payment

Making a substantial down payment can reduce the loan amount and subsequently the payable EMIs. It is advisable to set aside this money before apply for home loan.

Compound Interest on EMIs

Lenders may impose compound interest on housing loans. It is calculated by adding interest to the principal amount on top of the incurred interest. The amount of your monthly, quarterly, half-yearly or annual EMI might differ depending on the frequency of calculation. Compound interest rates may be charged in the form of annual percentage rates (APRs) with the EMIs computed after factoring in the interest rate, loan tenor and other fees levied by lenders. 

Non-Payment of EMI Interest 

Lending institutions will charge additional interest on top of the EMI amount if the borrower misses payments and extends the scheduled due date by a particular number of days. In order to prevent loan defaults, which could lead to penalties and harm one’s credit report, borrowers should ensure that they have sufficient money in their accounts so that lenders might deduct payable EMIs by the due date.

Summing Up

Your home loan EMI depends on a variety of elements. Keep these in mind when scouting for favourable rates of interest and avail competitive EMIs. It can make repayments comfortable without putting a strain on your existing monetary resources. Therefore, explore different loan alternatives and do your due diligence before picking the ideal deal that can give you lower EMIs.