Finance
How to calculate EMI for a home loan
The EMI formula is short, but what it implies about your money over twenty years is not obvious. Here is what each part does and where the cost really comes from.
By the CALQEVA editorial team2 min read
The formula
An EMI is calculated so that a fixed monthly payment clears both the interest and the principal by the end of the tenure. The standard reducing-balance formula is EMI = P × r × (1 + r)ⁿ / ((1 + r)ⁿ − 1), where P is the amount borrowed, r is the monthly interest rate and n is the number of months.
The monthly rate is the annual rate divided by twelve and then by a hundred. A loan quoted at 8.5% a year has a monthly rate of 0.0070833. Using the annual figure directly is the most common mistake in a manual calculation, and it produces an EMI roughly twelve times too large.
What sits inside each instalment
Each month, the lender first charges interest on the balance you still owe. Whatever is left of your EMI reduces the principal. Because the balance falls a little each month, the interest portion falls and the principal portion grows, even though the EMI itself never changes.
On a twenty-year loan, the first instalment is mostly interest. Roughly halfway through the tenure the two halves cross over. This is why the yearly breakdown matters more than the EMI figure alone when you are comparing offers.
The three levers you control
Only three inputs change the outcome, and they do not pull in the same direction.
- Loan amount: a larger loan raises the EMI proportionally. Borrowing 10% less lowers the EMI by 10%.
- Interest rate: small changes compound over a long tenure. Half a percentage point on a twenty-year loan is worth checking between lenders.
- Tenure: a longer tenure lowers the monthly payment and raises the total interest. It buys affordability, not savings.
Fixed, floating and what changes later
Most Indian home loans are floating rate, linked to an external benchmark. When the benchmark moves, lenders usually keep the EMI the same and extend or shorten the tenure instead. That keeps your monthly budget stable but changes how long you carry the loan.
If your rate changes, recalculate using the balance you still owe and the months remaining rather than the original figures. The answer will be closer to reality than assuming the original schedule still holds.
Before you sign
Look past the EMI to the total payment. Two offers with the same EMI can differ by lakhs in total interest if one runs three years longer. Check the processing fee, whether prepayment charges apply, and whether the rate quoted is for your credit profile or a headline rate for the best borrowers.
Try it with your own numbers
Keep reading
- Prepaying a loan: what actually saves the mostWhen you prepay a loan, you usually choose between a lower EMI and a shorter tenure. Here is how the two differ and when each one makes sense.
- Old or new tax regime: which one fits youThe new regime has lower rates, the old one has deductions. Here is how to work out which leaves you with more, using your own numbers.