How Can You Compute Your Home Loan EMI?

An EMI (equated monthly instalment) is an important part of opting for a home loan or other loan options, but it can be very tough to estimate how much amount you can afford. With an online HDFC home loan EMI calculator or online LIC home loan EMI calculator, you as a borrower of a home loan can estimate your monthly repayments depending on your home’s cost, down payment, rate of interest, loan repayment tenure and other important expenditures.

How do financial institutions compute your home loan proceeds?

A series of computations take place before the financial institutions determine how much proceeds on a home loan an applicant may borrow. These factors include –

EMI / NMI ratio 

The financial institutions decide the loan eligibility funds post deducting the income tax on monthly income and the rest of the net monthly income i.e., NMI. In simpler words, it is the highest home loan proceeds an applicant may borrow depending on the NMI minus the prevailing loan proceeds.

Most lenders have placed a cap on the highest limit on EMI / NMI ratio. For example, the SBI or State Bank of India has placed a cap on the limit as follows –

20 per cent – up to Rs 60,000

25 per cent – Between Rs 60,000 and Rs 1.20 lakh

30 per cent – Between Rs 1.20 lakh and Rs 2 lakh

50 per cent – Between Rs 2 lakh and Rs 5 lakh

55 per cent – Between Rs 5 lakh and Rs 10 lakh

65 per cent – Over Rs 10 lakh

Note that, this percentage may be enhanced by including a co-applicant when you apply for the home loan. Let’s understand how you can compute your EMI/NMI ratio using an example. If the applicant’s monthly income is Rs 75,000 after tax deduction and the financial institution is providing 25 per cent of the EMI/NMI ratio on this income slab, the highest EMI amount that the applicant can get is 25 per cent of 75,000 i.e., Rs 18,750. However, if the applicant already holds Rs 5,000 as an existing EMI on other credit options, then the highest EMI proceeds he can get further would be Rs 18,750 – Rs 5,000 = Rs 12, 750.

Loan to value or LTV ratio – The LTV ratio is computed after assessing the home value and the maximum loan proceeds that an applicant receives. Lenders usually pay 75 per cent to 90 per cent of the property’s cost and the rest of the amount must be paid by the applicant on an upfront basis even addressed as a down payment amount.

For instance, if the home value equals Rs 30 lakh and the financial institution’s LTV ratio equals 75 per cent, the highest loan proceeds the applicant may get is 75 per cent of Rs 30 lakh i.e., Rs 22.50 lakh.

What’s the formula to compute the EMI of the home loan?

Once you as an applicant have figured out how much funds you can borrow depending on the EMI/NMI factor, then the EMI plays an important role. The EMI is the principal plus interest constituent on the outstanding loan. Let’s understand how the EMI computation is performed with an example.

Also Check: LIC Home Loan EMI Calculator

If an individual gets a home loan equaling Rs 10 lakh at a rate of interest of 7.20 per cent per annum for a repayment tenure of ten years, then the loan EMI would be computed using the listed formula.

P X R X (1 + R) ^ N / [(1 + R) ^ N -1]

P = Principal loan proceeds = Rs 10 lakh

N = loan repayment tenure = 120 months

R = rate of interest per month = 0.006 i.e., 7.2/12/100

Loan EMI = Rs 10 lakh X 0.006 X (1 + 0.006) 120 / [(1 + 0.006) 120 -1] = Rs 11,714

How do EMI computations assist you to repay your home loan?

Knowing to compute your EMI can assist you to make an informed decision about whether you want to make a home loan application payment based on your existing personal finance. It assists you as an applicant to compute the monthly fund outflow that goes towards your home loan and down payment required to buy your dream home. Thus, knowing the method involved in computing the loan EMI is important to know your eligibility for a home loan and hence allow you to avoid any unnecessary expenditures that go into planning to purchase or build a home.

How do financial institutions compute the rate of interest on the EMI?

Lenders, financial or banking institutions generally levy floating interest rates on a home loan while the fixed rate is even available. A fixed interest rate on a loan is fixed in nature for the overall loan repayment tenure while the floating interest rate is computed according to the base rate or the lender’s repo-linked interest rate or the marginal cost of fund-based lending rate plus the spread.

Return on investment or ROI on home loan floating rate for every lender changes according to the Reserve Bank of India’s (RBI) change in the repo rate. In floating interest rate, the change, however, gets reflected post the reset period when the rate of interest on your loan EMI is subject to revisions. Listed here are some of the major distinctions between the floating interest rate and fixed interest rate.

Floating interest rate Fixed interest rate
Interest rates fluctuate according to the lenders and change in the Reserve Bank of India’s policy rates. A fixed interest rate is available for the whole repayment period or part of the repayment period.
The interest rate is lower as compared to the fixed interest rate. The rate of interest is higher
Generally, there is zero prepayment charge. The prepayment charge is higher.
The interest rate is linked to the repo rate. A lower chance of paying less when the interest rates fall.

Rate of interest levied by the financial institutions on home loan EMI – 

Private sector and public sector financial institutions offer home loans at a specific interest rate on EMI. Your income, EMI/NMI ratio, property value, etc., play a crucial role in getting a lower return on investment on the borrowed amount.

The policy repo rate increment by the RBI has resulted in many lenders increasing their rate of interest on home loans. Presently, the home loan rate of interest is beginning from usually 8 per cent per annum onwards.


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