I have been doing some research on home loans of late.
I am really confused about the way banks calculate EMI.
Let me explain this with an example:
Say I want a loan of 10 lacs and the interest rate is 9.25% p.a (fixed) for 20 years. So, by calculation the total amount i need to pay shall be:
Principal: 10 lacs
Interest: 18.5 lacs
Amount: 28.5 lacs

So, if I simply divide this across 20 yrs and 12 months each ryr, then the EMI would be: 11875

Instead banks have charts which says that for every 1 lakh loan (interest being 9.25) the EMI would be 9200. This is less than my simple calculation.

I understand that as one pays out EMIs the principal reduces and banks take into consideration all such factors. But this process of arriving at a constant EMI (in this cae 9200) is never transparent to the customers.

Can anyone point out how all this calculation is done. Any site where I can learn this?
Read more
Reply
15 Replies
Sort by :Filter by :
  • There is small correction in the formula you are using.


    This is the formula to calculate EMI:

    E = P×r×(1 + r)^n/((1 + r)^ n) - 1)

    E is EMI

    where P is Principle Loan Amount

    r is rate of interest calculated in monthly basis it should be = Rate of Annual interest/12/100

    if its 9.25% annual, then r=9.25/12/100=0.007708


    n is tenture in number of months n = 12*20 = 240

    Eg: For 100000 at 9.25% annual interest for a period of 20 years

    it comes to

    EMI = {1000000 X 0.007708 X ((1 + 0.007708)^240)} / {((1 + 0.007708)^240) - 1}

    =(1000000*0.007708*((1+ 0.007708)^240))/(((1+0.007708)^240)-1)

    = 9158/- approximately 9200/-
    CommentQuote
  • There are no fixed formula for loan EMI calculation. Bank employs their financial wiz kids to workout the best proposition for the ban. In general, there are daily reducing, monthly reducing and yearly reducing methods.
    Daily reducing to different banks are different... technically, it should be the day your EMI is debited from your paying account but banks are greedy and some go to the extend of crediting the EMI account to your loan account only at the end of the month!!
    Just do a simple survey, ask few banks to give you EMI for same loan amount and same interest rate ... interestingly, there will be a small difference.

    My advice is, don't count the pennies ... there are many and many important factors for a home loan .. unfortunately most of the people are blindly carried away by interest rate only!!
    CommentQuote
  • Could you pls. help important factor for home loan?
    It would be helpful to everyone

    Originally Posted by gharondabhai
    There are no fixed formula for loan EMI calculation. Bank employs their financial wiz kids to workout the best proposition for the ban. In general, there are daily reducing, monthly reducing and yearly reducing methods.
    Daily reducing to different banks are different... technically, it should be the day your EMI is debited from your paying account but banks are greedy and some go to the extend of crediting the EMI account to your loan account only at the end of the month!!
    Just do a simple survey, ask few banks to give you EMI for same loan amount and same interest rate ... interestingly, there will be a small difference.

    My advice is, don't count the pennies ... there are many and many important factors for a home loan .. unfortunately most of the people are blindly carried away by interest rate only!!
    CommentQuote
  • Hi All ,

    The following are the most important factor on the home loans

    a) The EMI is based on daily reducing balance method. This means if you had deposited money on 5th then the bank will charge on the balance from 6th onwards where as in the monthly reducing balance the impact of you paying the principal component is from the next month only

    b) No prepayment of penalty... though RBI/NHB has given a circular on it ... there are companies who are still charging ... stating to customers that they are under discussion on it

    c) Loan given on the basis of base rate ... RBI has prescribed the method of computation of base rate and all the banks have to publish the same.

    d) Take loan from bank which reduces the rates when RBI reduces its repo rate

    e) Ask for all documents before sanction of loan ... this ensures that you are buying a right property.

    f) you can see your interest and payment statements online

    g) feature to park and withdraw surplus funds and thereby pay less interest .... like max gain feature of SBI

    My personal experience is that SBI has all the above feature .. though they take time on disbursement once done you are reassured for years.
    CommentQuote
  • What about the period when full EMI starts. Axis bank starts full EMI at possession or 18 months, whichever is earlier. So it is 18 months mostly.

    For HDFC full EMI starts only after possession.
    CommentQuote
  • Can someone please tell me how the ratio of the Principal and interest calculated by banks in the EMI.

    In the example shown below if 9200 is the EMI , what is the ratio of the Principle and Interest??

    Is it constant for all banks ??

    Originally Posted by pank2012
    There is small correction in the formula you are


    This is the formula to calculate EMI:

    E = P×r×(1 + r)^n/((1 + r)^ n) - 1)

    E is EMI

    where P is Principle Loan Amount

    r is rate of interest calculated in monthly basis it should be = Rate of Annual interest/12/100

    if its 9.25% annual, then r=9.25/12/100=0.007708


    n is tenture in number of months n = 12*20 = 240

    Eg: For 100000 at 9.25% annual interest for a period of 20 years

    it comes to

    EMI = {1000000 X 0.007708 X ((1 + 0.007708)^240)} / {((1 + 0.007708)^240) - 1}

    =(1000000*0.007708*((1+ 0.007708)^240))/(((1+0.007708)^240)-1)

    = 9158/- approximately 9200/-
    CommentQuote
  • Originally Posted by nitinloomba
    Can someone please tell me how the ratio of the Principal and interest calculated by banks in the EMI.

    In the example shown below if 9200 is the EMI , what is the ratio of the Principle and Interest??

    Is it constant for all banks ??


    The ratio would keep changing from month to month. In the first month, the interest would be 7700 and the principal 1500. So the ratio would be 0.1948. In the second month, the interest would be 7697 and the principal, 1503, so the ratio would be 0.1952. The ratio would go on increasing as you would move towards the end of the loan tenure. Somewhere around the 12th year, the ratio would exceed 1.
    CommentQuote
  • Ok , but how is the ratio determined .. does it vary from bank to bank???
    CommentQuote
  • pls refer attached xl based loan calculator...:)
    CommentQuote
  • yes I agree.. I also came to a similar figure while calculating this using a amortization calculator on one of the website..

    P=10L, ROI=9.25 , DURATION = 240MTHS


    BUT THE IMPORTANT QUESTION IS , THE BASIS ON WHICH THE RATIO BETWEEN PRICIPAL & INTEREST DETERMINED ??

    DOES IT VARY FROM BANK TO BANK?

    Originally Posted by stinaikar
    The ratio would keep changing from month to month. In the first month, the interest would be 7700 and the principal 1500. So the ratio would be 0.1948. In the second month, the interest would be 7697 and the principal, 1503, so the ratio would be 0.1952. The ratio would go on increasing as you would move towards the end of the loan tenure. Somewhere around the 12th year, the ratio would exceed 1.
    CommentQuote
  • Originally Posted by nitinloomba
    Ok , but how is the ratio determined .. does it vary from bank to bank???


    Why would it differ from bank to bank? If both banks are charging you the same interest rate and have the same loan tenure, then both of them would have the same ratio and the same EMI.
    CommentQuote
  • Originally Posted by nitinloomba
    yes I agree.. I also came to a similar figure while calculating this using a amortization calculator on one of the website..

    P=10L, ROI=9.25 , DURATION = 240MTHS

    then :

    Sr. No EMI AmountPrincipalInterestBalanceOpening Balance 1000000 19159145177099985492915914627698997088and so on ...

    BUT THE IMPORTANT QUESTION IS , THE BASIS ON WHICH THE RATIO BETWEEN PRICIPAL & INTEREST DETERMINED ??

    DOES IT VARY FROM BANK TO BANK?


    The ratio is determined by a mathematical formula that calculates EMI based on the loan amount, the interest rate and the loan tenure. As long as these three factors are the same, the EMI and ratio will be the same for every bank.
    CommentQuote
  • Thanks guys, i thought so but still got confused ..:o after i talked to a couple of ppl who took loan from some private banks ..

    Although I argued with them , but i just wanted to make sure Im right ..

    And IREF is just the right place to confirm things like these..


    cheers!
    CommentQuote
  • Loan Pre-payment calculator

    Can anyone provide a Home Loan pre-payment calculator . In case of partial pre-payments made to the bank , how is the revised/ reduced loan tenure calculated keeping the emi as same. Appreciate if anyone has this calculator.
    CommentQuote
  • How To Deal With The Pressure Of Paying EMIs?

    Your life would change quite significantly as soon as the banks from which you took your home loan starts deducting the equated monthly installment (EMI). Banks generally link your salary account with your loan account, and start the EMI amount would automatically deduct every month after which you would receive an SMS on your registered mobile number. This means a significant portion of your earning --- this would be half your salary -- will be reduced towards repayment before it reaches you. You will have to make several changes in your lifestyle to cope with your new financial situation.

    Let us look at certain things that you as the payer of EMIs must do.

    Start making notes: If noting every little expense was not your thing, it is incumbent upon you to make it your habit now. Since you are hard placed financially which leaves you no room to go wrong, every penny must be counted. To begin with, make a list of your monthly expenses and your earning in this period. After doing all the calculations, check out what kind of monthly savings you get. Significant changes in your lifestyle might have to be made based on the number that you derive from all the calculations.

    Make cuts where you can: There are so many areas where making cutting down the expense is not an option for you. For instance, if you are paying a monthly amount of Rs 10,000 towards payment in a life insurance policy, there is absolutely nothing you could do about reducing this expense. The same is true of utility bills that include water, electricity, phone, gas pipeline and internet connection bills, the maintenance charges you will be paying to your housing society, your medical bills, your travel expense, etc. Now explore the areas where you could cut corners. The monthly spending on leisure and entertainment would emerge as the only option at this juncture.

    Increase your income: Wise men say that the true wise are those who look for more earnings when their expenses go higher. They are not intimidated by the growth of expense and start eking out a living. To increase your income in fact is the best way to deal with your new situation. Switching to a new job could be an option. You could also go for part-time jobs in your free time. Before you reach a level where your find yourself financially comfortable, it would be only the best to stick with financial discipline. Do be mindful of the fact that increased earnings should also result in increased savings—the rise should not be used only to fund a better lifestyle. This is one of the little sacrifices you would have to make as a home owner.
    CommentQuote