How to Calculate Home Loan Interest Rate?

Wondering how to calculate home loan interest rates? Home loans usually come with fixed and floating rates of interest. The latter refers to rates which vary over a sustained period of time while the former indicates rates that remain constant over a fixed duration. Before you start comparing the lowest home loan interest rates, you should take a closer look at the intricacies behind home loan interest rate calculation. 

Formula for home loan interest rate calculation 

There is a basic formula that is deployed for calculating interest rates on home loans. This has been outlined below: 

EMI on the home loan = [P x R x (1+R) ^n] / [(1+R)^ n-1]

This is the same formula that you can use for calculating the interest rate on your home loan while it also works as a home loan EMI calculator. The rate of interest here is denoted by R while P and n stand for the principal amount on the home loan and the number of equated monthly instalments or EMIs. Let us assume that the principal amount is Rs. 20 lakh and the rate of interest is 9% per annum, i.e. 0.75% per month (9/12) while n or the duration is 180 months. The EMI will thus stand at ((2000000*.75 /100*(1+.75 /100) ^180/((1+.75 /100)^180-1))) which is Rs. 20,285.33 approximately. This borrowed example will help you clearly understand the nuances behind the calculation. 

Some other tips on home loan EMI calculators 

You will find calculators for your home loan EMI online and can use similar calculators for working out the rate of interest as well. The EMI will comprise of the principal and interest portions and in the initial loan years, the latter will exceed the former while the balance will reverse towards the last few years of the loan tenure. Here are some other points that you need to keep in mind: 

  • Interest is charged by banks in various ways, namely annual reducing, monthly reducing and daily reducing balance. 
  • The daily reducing balance method is used majorly for home loans while a few housing finance entities may go for the monthly reducing balance system. In the daily reducing balance system, the principal amount will naturally go down on the day that the EMI is paid. Since the EMI is paid on a monthly basis, there will be a negligible difference on the interest rate that is effective, unless a prepayment has been made. 
  • If there is a prepayment made, the principal outstanding will go down on the day that partial prepayment has been done. Hence, if EMIs are paid on the 5th day of each month and prepayment is done on the 10th day, the outstanding principal will go down instantly under the daily system. In the monthly system, the prepayment will be regarded as on the 5th of the next month. 
  • Repayment throughout the home loan duration will be clearly outlined in the schedule for loan amortization which shows the principal and interest paid and the principal outstanding at the end of each month. 

You can also calculate your EMIs through Microsoft Excel if that is more convenient. Use the PMT method and you will need the loan period, rate of interest and loan amount/present value. If the rate of interest is 10% you will have to get it divided by 12 and the tenure will be the duration in months. The tenure will thus be 240 months if it is 20 years. The payable EMI on the net loan amount of Rs. 50 lakh will thus stand at Rs. 48,251 approximately with the interest rate and duration mentioned above. 

Just click “=” and key in “PMT (rate of interest, tenure, duration of the loan)” and then press Enter. The sheet will produce the amount in a negative value, indicating cash flow to be incurred by the borrower. So for the above calculation, it will be this formula- PMT (10%/12, 20, 5000000). 

Learning more about PMAY 

The Pradhan Mantri Awas Yojana (PMAY) has been a milestone in the affordable and mid-income housing sector, incentivizing a large section of the population to purchase their own homes at subsidized rates of interest, thereby making homeownership available to all. 

Here are some things that you should keep in mind: 

  • CLSS (Credit linked subsidy scheme) for MIG (middle-income group) I and II have been extended till March 2021. 
  • MIG I is households earning Rs. 6-12 lakh annually while MIG II is households earning Rs. 12-18 lakh annually. 
  • PMAY interest subsidy is 4% and 3% for MIG I and MIG II respectively with a home area of 160 and 200 square meters respectively. The maximum loan duration is 20 years and NPV subsidy works out to Rs. 2.35 lakh and Rs. 2.30 lakh respectively. 
  • Beneficiaries under LIG and EWS sections will get interest subsidies of 6.5%. EWS households are those earning up to Rs. 3 lakh per annum while LIG households are those earning between Rs. 3-6 lakh per annum. 
  • The interest subsidy will be the NPV (net present value) of the amount. 
  • Borrowers may avail of PMAY home loans from SCBs (scheduled commercial banks), RRBs (regional rural banks), HFCs (housing finance companies), urban cooperative banks, state cooperative banks, NBFCs (non-banking finance companies) and SFBs (small finance banks). 
  • There will be zero processing charges for home loan amounts which are eligible based on the income criteria as per PMAY. For extra loan amounts surpassing the eligible amount for a subsidy, lenders will be charging regular processing fees. 

The PMAY has been a major boon for first-time home buyers, lowering interest outgo and making homes more affordable for a vast majority of people living in rural and urban areas alike.

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