Given the loan amount, interest rate and home loan tenure, how many of us can calculate the quantum of EMI? I bet not many can. And most of those who can require spreadsheet software to calculate. We have written about how reducing balance home loans work. The post explains about the workings of EMI calculations. While it helps appreciate the mechanics, it does not really help in estimating the EMIs. Is there a heuristic or a shortcut to estimate the EMI amount?
A Short Cut to Estimate EMI
Let’s say you plan to take a loan of Rs 50 lacs. Interest rate is 8% p.a. Loan tenure is 20 years. Now, for the loan to get repaid, you must pay more than just the interest on the loan during the year.
A loan of Rs 50 lacs at 8% p.a. will require interest service of Rs 4 lacs in the first year (Rs 50 lacs x 8%). The interest payment will be less than Rs 4 lacs since this is a reducing balance loan. But this gives an idea. And don’t forget that some portion must go towards principal repayment too.
Now, divide Rs 4 lacs by 10 (and not 12) to arrive at the approx. EMI.
Rs 4 lacs / 10 = Rs 40,000
Actual EMI for the above loan = Rs 41,822
Note this is an approximation only for a 20-year loan. You can see that the difference between estimated EMI and the actual EMI rises if we increase or decrease the loan tenure.
| Loan Amount | Tenure (Months) | Interest Rate | Estimated EMI | Actual EMI | Difference |
| 50,00,000 | 240 | 7% | 35,000 | 38,765 | 3,765 |
| 50,00,000 | 240 | 8% | 40,000 | 41,822 | 1,822 |
| 50,00,000 | 240 | 9% | 45,000 | 44,986 | -14 |
| 50,00,000 | 360 | 7% | 35,000 | 33,265 | -1,735 |
| 50,00,000 | 360 | 8% | 40,000 | 36,688 | -3,312 |
| 50,00,000 | 360 | 9% | 45,000 | 40,231 | -4,769 |
| 50,00,000 | 180 | 7% | 35,000 | 44,941 | 9,941 |
| 50,00,000 | 180 | 8% | 40,000 | 47,783 | 7,783 |
| 50,00,000 | 180 | 9% | 45,000 | 50,713 | 5,713 |
However, since most banks offer home loans for 20 years, this is a fine approximation. If you want a shorter or longer tenure, you can adjust the divisor higher (for 30-year-loan) and lower for (15-year-loan). But that’s just complicating matters. Why not use a loan calculator?
With Online Loan Calculators, You Don’t Have to Do Manual Calculations
We have online loan calculators available that can help you calculate actual EMIs in a few seconds. Thus, you don’t really need to work out these numbers in your head.
And don’t just work out these numbers for the prevailing rate of interest. Check the result for slightly higher interest rates too. Home loans are long duration loans. And interest rates go through cycles. The home loan EMI may be affordable now but an increase in interest rates will increase your EMI. Will the new EMI be affordable?
If your answer is in the negative, we have a problem. In such a case, you can consider higher down-payment or longer home loan tenure.
Refer to the tabulation shared earlier in the post.
Rs 50 lacs loan at 7% for 20 years has an EMI of Rs 38,765.
At 9% p.a. the same loan will have an EMI of Rs 44,986. Increase of almost Rs 6,200.
Had the loan amount been Rs 1 crore, the increase will be ~Rs 12,400. If that’s going to be a problem, request your bank for a higher loan tenure upfront.
For instance, the same Rs 50 lacs at 9% p.a. for 25 years has an EMI of Rs 40,231. Increase is only about Rs 1,500 (over EMI of 50 lacs loan for 20 years at 7% p.a. I assume this EMI is affordable)
Yes, a longer home loan tenure means higher nominal interest payments, but you get a longer rope too. Additionally, as your financial position gets comfortable, you can make loan prepayments and reduce loan tenure. There is no penalty on prepayment of a floating rate home loan.
A Home Loan Calculator Can Help in Other Ways Too
We tend not to touch things that we don’t understand. If you don’t understand how a change in interest rate will change your EMI, you won’t be proactive in taking advantage of beneficial changes in interest rates.
There have been umpteen cases where borrowers have not migrated their loans from PLR to Base Rate, Base Rate to MCLR and MCLR to Repo rate linked loans. They discovered much later that they could have saved a lot of money by migrating their loan to the latest loan regime. The banks usually don’t tell their borrowers about such beneficial changes. Such borrowers were either completely or never appreciated the impact regime change could make.
A home loan balance transfer is another example where a home loan calculator can help. Its important to keep track of interest rate changes while servicing your home loan.
If you can access a calculator that can quickly assess the impact for you, you may not miss out on these low hanging fruits.