Here's How You Can Calculate Your Home Loan EMI

Buying our own home is a dream many of us share; however, one common challenge all of us face is the dilemma of how to finance the purchase. These days, although it has become easier to get a home loan from either a bank or an NBFC (non-banking financial institution), it is still immensely important for you to plan your personal finances before you make the final purchasing decision. 

When you are purchasing a home for yourself or your family, one of the first aspects of personal finance you should invest your time in is to calculate the EMIs of your home loan, and in today’s article, we will discuss exactly that.

Why Is Calculating the EMI Amount Important?

Irrespective of the many factors that influence the buying process, one of the main proponents of deciding how much home loan you can afford is dependent upon the EMI you can pay on a monthly basis. Calculating the EMI, which is the industry abbreviation for Equated Monthly Installments, will help you determine not only the total amount of home loan you can afford but also get a better idea of your personal finances. 

Most buyers calculate the EMI amount only when they take out a fresh home loan; however, experts suggest that the process should be reiterated even if you are transferring the loan between lenders as well.

How to Calculate the EMI of Your Home Loan?

In order to calculate the EMI of your home loan, follow the steps mentioned below. 

1. Figure Out the Loan Amount 

The first and by are the most important step to calculate your EMI amount is to figure out the amount of home loan you will need. Since the EMI calculation formula dictates that the principal amount be taken into consideration, determining the total amount of home loan you will require is a must. 

If you are still in the early stages of the home buying process, a good place to start will be to multiply your net annual income by 5. Although this calculation might differ among lenders, this rough estimate can be a good starting point. Along with this, you also need to take into account that most lenders only finance upto 80% of the property value, with some exceptions who finance upto 90%. 

Although the final loan amount you will be approved for will vary between lenders and a lot of consecutive factors, such as the nature of your profession, the total value of your property, the interest rate, and the tenure, a rule of thumb most lenders follow is lowering the percentage of finance, as the overall property value increases. 

2. Find the Tenure of Your Loan

Home loans in India typically arrive with the longest tenure, with some extending upto 30 years. While extending the tenure of the loan, lenders take into consideration your current age and accordingly offer you a tenure which will end by the time you are 60 years old. Let us understand this better with an example. 

If you are currently 30 years of age, you can get a loan with a tenure of 30 years, such that it will be fully paid off by the time you are retiring. On the other hand, if you are currently 45 years of age, you can only get a loan with a maximum tenure of 15 years, such that it is fully paid off by the time you retire. 

Along with this, you need to take into consideration the fact that the longer the tenure of your loan, the higher will be the interest rate you pay on the loan. Additionally, before granting you a loan, lenders will access your credit history, and in order for your application to get approved, the total sum of all your EMIs should not exceed 50% of your net monthly income. This is a rule of thumb, followed by lenders all across India, such that you can manage your personal finances better and avoid a default in payment. 

3. Figure Out Your Interest Rate

The final aspect you need to figure out before you can calculate your EMI is the interest rate applicable on your loan. While all borrowers want to avail the best interest rates on their loans, it is very important to consider that lenders take into account a variety of factors before extending you a preferred rate of interest. Starting all the way from the type of employment you possess (salaried or self-employed) to your credit score, everything is considered. Along with this, women borrowers are often given a lower rate of interest on home loans. 

Taking these factors into consideration early on in the process will allow you to accurately estimate the interest rate applicable on your home loan and negotiate with the lender to get it down to a value that works for both of you. 

The Calculation

Now that you have collected all the required information, you can go about calculating your EMI amount in two different ways. They are as shared below. 

1. Online Method

These days there are multiple free calculators available on the websites of loan aggregators, banks, NBFCs as well as housing companies, which will let you calculate both the EMI and, in few cases, even download the amortization schedule for your home. 

In order to find such a calculator, all you need to do is search for a free home loan EMI calculator, and you will come across many websites which offer this service. 

2. Using MS Excel

Another great way to calculate your EMI amount is to use MS Excel. In order to do so, you need to enter the following formula.

EMI = [P x (R/100) x (1+R/100) ^n] / [(1+R/100)^ n-1]

Where, 

• P is the principal amount 

• R is the rate of interest applicable on the loan, and

• N is the total tenure of the loan

For example, using this formula, if your principal amount, P, is ₹30 lakhs, rate of interest, R is 9% per annum, and tenure, N is 180 months, then your EMI amount will be ₹30,428.

Conclusion:

Planning your personal finances is extremely important before you take a loan, and thus it is our hope that this article has made the process simple. If you have any questions, feel free to reach us at the comments section below. All the best.