Home Loan Interest Calculation: How Does It Work?

Investing in a home requires planning. While a home loan is the best way of bringing you closer to achieving your dream, bad planning can also put you in situation of financial liability.One of the major portions of a home loan, is the interest accrued and paid over it. Here is a quick and easy guide on how to calculate the same.

Home loans in India are offered with two types of interest rates:

• Floating: which varies over a period of time
• Fixed: where the interest is constant for the tenure of loan.

The formula used for arriving at the EMI is:EMI = [P x R x (1+R) ^n] / [(1+R)^ n-1]Here, P= Principal loan amount, R= Rate of interest, n= Number of monthly instalments.An example:Assuming, P= Rs 20 lakh,R= 9 percent per annum= 9/12= .75 per month,N= 180 monthsEMI = ((200000*.75 /100*(1+.75 /100) ^180/((1+.75 /100)^180-1))) = Rs 20,285.33

Every institution or bank also offers a home loan calculator. Simply put, a home loan calculator helps you calculate the equated monthly instalments (EMIs) you have to pay the lender each month till the loan is fully paid.This is based on three things:

• Home loan amount - It has to be between Rs 50,000 and Rs 1 crore.
• Tenure/ Time Period - The tenure has to be between 1 year and 30 years.
• Interest rate - It has to be between 1 percent and 50 percent.

To arrive at the EMI, one has to input – home loan amount, tenure and interest rate.

The results will show three things - a. The EMI - This amount is to be paid each month till the loan is fully paid. b. The break-up - It shows the interest portion in each month's EMI. The rest is the principle being repaid each month. c. The amortisation schedule - The amortisation schedule is a product that shows the break-up of the interest paid and principle repaid out of the EMI each month till the end of the tenure. The outstanding balance after paying each month's EMI is also shown in the amortisation schedule.For any first-time buyer, it is important to understand your monthly income and then reverse engineer it to calculating the EMI and Interest on your home loan. Idea is to plan long term, without jeopardizing your immediate needs.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.