25 NOVEMBER, 2021

EMI could be the most important terminology for you if you are a new home loan borrower. EMI or Equated monthly installments are the equal monthly payments you need to pay towards the loan repayment when you avail a home loan. It helps you spread the loan amount over a longer duration, and saves you from the pressure of paying the entire home loan amount at once. However, did you know that your loan EMI contains a higher ratio of the interest component than the principal at the beginning of the tenure? Read more about it below.

Components of EMI

Your EMI consists of two components: principal and interest. The interest component forms a significant part of the entire EMI amount. If the interest rate is low, you will have to pay a lower EMI and vice versa. This is why home loan borrowers are suggested to choose the loan carefully to get the best home loan interest rates.

Why is the interest component higher initially?

At the beginning of the loan tenure, the interest component is higher. However, as the loan progresses, the interest amount reduces, and the principal component increases. It is because the interest is based on the principal amount. When the loan repayment starts, the interest is calculated on the entire principal amount, and thus is higher.

However, gradually as you keep paying your loan, the principal decreases and so does the interest as it is calculated on the reduced principal amount.

A loan amortization schedule helps you understand the breakup of principal and interest components in an EMI. This loan amortization schedule is useful when you need to foreclose or transfer the loan as it helps you find the right time to close the loan./p>

Similarly, because both the components are unequal, the tax benefit of both principal and interest components is regarded separately. While you can claim tax benefit on interest under section 24(b), the principal component is available under section 80C of the Income Tax Act 1961.

How is your EMI determined?

Your EMI is determined after considering the following factors - tenure, interest rate, and loan amount. If you avail a fixed interest rate loan, your loan EMI is constant for the entire tenure. However, your EMI can fluctuate based on the benchmark rate for floating interest rates home loans.

There are two ways to calculate the EMI - using a mathematical formula or calculator.

The formula to calculate the EMI value is:

EMI = P × r × (1 + r)n/((1 + r)n - 1)

Where,

P - principal

r - rate of interest

N - tenure

Alternatively, an easier way to determine your EMI is by using a home loan EMI calculator. You can find a home loan EMI calculator on the lender’s website. Enter the loan amount, interest rate, and tenure, and the results will be displayed instantly. You can also determine your tenure, and plan your finances better with the help of the EMI calculator.

Now, when you know how your EMI is calculated, you can determine your affordability and avail a suitable housing loan. Visit Kotak Mahindra Bank’s home loan webpage and apply for home loan, today.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.