Owning a home is a big financial decision and a dream for every individual. Due to financial constraints and sky rocketing prices of properties, the next to best option of seeing through one’s dream is by availing a home loan.

Before choosing a home loan it is very important to understand about the EMIs, which is the amount a borrower has to pay the lender, every month for a stipulated period of time.

How is EMI calculated?

The formula for EMI requires the loan amount, the tenure (loan period) and the interest rate charged. One can calculate the interest needed to pay using a simple calculator or even excel. Alternatively, several banks and housing finance companies offer an EMI calculator tool on their website which is simple to use too.

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 months

EMI = ((200000*.75 /100*(1+.75 /100) ^180/((1+.75 /100)^180-1))) = Rs 20,285.33

How do banks calculate EMI?

Every institution or bank also offers a home loan calculator. Simply put, a home loan calculator helps you calculate the equated monthly installments (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, which is either floating or fixed
  • Method of computation: whether it is annual, monthly or daily reducing loans, basically the modus by which principle and interest is reducing through repayment
What we arrive at after the calculation is:

a.The EMI - Amount that 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 amortization schedule – which 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 amortization schedule.

Taking the above into account, plan your finances – immediate and future, while applying for a home loan

Learn more about your Home Loan Eligibility here.


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.

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