What is a home loan?

Home Loan is a secured loan and the property acquired by the loan borrower is held as security by the bank or the lending entity through the loan tenor. The characteristics of the Home Loan are created in such a manner that the repayment by the applicant (as EMI or partial amount) may be stretched over a long period, often as long as 20 to 30 years. Best way to find out the eligibility for the Home Loan is using the Home Loan Eligibility Calculator. It is imperative to note that the Home Loan is taken off successively as the development of the house continues.

What is a home loan interest rate?

The home loan interest rates are the rates at which a certain amount is borrowed. It is one of the main variables influencing borrowing rates. A reduced rate of interest on a home loan is often desired as it lowers the overall payment of interest.

Different type of interest rates

Fixed Interest Rate – The Fixed interest rate remains the same during the loan period, holding the EMI home loan stable. Applying for a fixed interest rate home loan is beneficial if the present rate of interest on the home loan is comparatively low, and an upward trajectory is predicted in the future. However, with the recent pattern of falling lending rates, banks provide borrowers with the possibility of switching interest rates to floating rates after a fixed amount of time has been completed.
Floating Interest Rate – The floating interest rate is subject to real market lending conditions and can therefore change over the term of the loan. Home loan EMIs can rise or fall as per the movement of the interest rate. With the recent pattern of falling home loan rates, it would be beneficial for potential home loan borrowers to qualify for home loans at a floating rate of interest.

What are the various methods of calculation home loan interest?

The interest of home loan can be calculated in two ways:

Flat rate: The calculation of interest is based on the principal sum you originally lent from the lender. It also ensures that even after ten years of repayment of the debt, the interest will be based on the original principal value, making you spend more on the interest. This method of interest estimation is generally used for microfinance purposes.

Reducing rate: When you make an EMI deposit, you pay a certain percentage as principal and the other as interest on your loan. This decreases the remaining principal balance over time. The lenders calculate the interest on this decreased unpaid balance. In this way, you pay less interest as the principal outstanding declines every time you pay the EMI of your loan. The reducing strategy may be either an annual, a weekly or a daily reduction. Banks use the daily balance-reduction approach to calculate home loan interest.

Determine the effective interest rate

The Interest Rate Estimate is based on some aspects of the Home Loan. Since the home loan is also related to external benchmark items, it is determined based on the formula:

Effective Interest Rate = Base Rate / External Benchmark Rate + Markup.

Base rate: It is the regular interest rate determined by the lender for the retail product lending. The base rate is updated from time to time by the home loan provider.

Markup or spread: It is the margin applied by home loan lenders over the base rate. Markups or spreads can differ across home loan schemes.

External Benchmark: As per the apex bank’s guidelines, lenders are bound to provide home loans linked to external benchmarks such as the RBI repo rate/ three-month treasury bill rate, among others. Any change in the external benchmark rate leads to a change in the interest rate of the home loan.

How to calculate the interest?

Formula of Flat Rate = Principal amount + Total Interest)/ Term of loan (months)
For interest = PRT/100
Formula for Reducing method = [ P x R x (1+R)^N]/[1 + R)^ (N-1)]

To make it simpler, suppose A takes a home loan of 50L at 8% for 25 years term. The following will be the interest calculation for both the methods:-

Flat Rate – 8.00%

Loan Amount = ₹ 50,00,000
EMI = ₹ 50,000
Total Interest = ₹ 1,00,00,000
Total Payments = ₹ 1,50,00,000
Periods = 300 months

Reducing Balance Rate – 8.00%

Loan Amount = ₹ 50,00,000
EMI = ₹ 38,591
Total Interest = ₹65,77,243
Total Payments = ₹ 1,15,77,243
Periods = 300 months

You save upto ₹ 34 lakhs during the loan tenure when you opt for Reducing rate method.

Conclusion: Calculating the EMI of home loan can be easily done by using our online EMI calculator. Try to opt for the reducing method to avoid paying extra. After entering the required details, you can get the detailed calculation of home loan EMI on your email address. Use these calculations to choose the best home loan option for yourself.