The formula banks use
Almost every lender in India uses the reducing-balance method. Interest is charged each month only on the amount you still owe, and the EMI stays the same throughout:
EMI = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1)
- P = loan amount
- r = monthly interest rate = yearly rate ÷ 12 ÷ 100
- n = number of monthly instalments
You don’t need to work this out by hand: the EMI calculator does it instantly and shows a year-by-year schedule.
A worked example
A home loan of ₹30 lakh at 8.5% for 20 years:
- r = 8.5 ÷ 12 ÷ 100 = 0.00708
- n = 20 × 12 = 240
- EMI ≈ ₹26,035 a month
- Total paid ≈ ₹62.5 lakh, of which interest ≈ ₹32.5 lakh
You pay more in interest than the house loan itself. That’s normal for long loans, and it’s why tenure and prepayment matter so much.
Where your EMI goes
In the early years, most of each EMI pays interest. In the first year of the loan above, about ₹2.5 lakh of your ₹3.1 lakh in EMIs goes to interest and only about ₹60,000 reduces the loan. By the last few years, almost the whole EMI reduces the principal. The schedule in the calculator shows this year by year.
How tenure changes things
| Tenure | EMI | Total interest |
|---|---|---|
| 15 years | ₹29,542 | ₹23.2 lakh |
| 20 years | ₹26,035 | ₹32.5 lakh |
| 25 years | ₹24,157 | ₹42.5 lakh |
Stretching from 20 to 25 years lowers the EMI by under ₹2,000 a month but adds about ₹10 lakh of interest.
How the rate changes things
A rise of just 0.5% makes a difference: the same ₹30 lakh for 20 years at 9% has an EMI of ₹26,992 and interest of about ₹34.8 lakh, roughly ₹2.3 lakh more than at 8.5%. Compare offers carefully, and ask your bank to move you to its current rate if yours is higher.
Three ways to pay less interest
- Choose the shortest tenure you can comfortably afford. Keep your EMI within about 40% of your take-home pay; check yours with the salary after tax calculator.
- Prepay early. In the example, one extra payment of ₹1 lakh after the first year (keeping the same EMI) finishes the loan about 18 months sooner. Most banks don’t charge for prepaying floating-rate home loans.
- Increase your EMI with your salary. Raising the EMI by 5% a year shortens a 20-year loan dramatically.
Before you take a loan
Work out what you can borrow with the house affordability calculator, which applies the same limits banks use on income and down payment. Remember the extra costs: processing fees, stamp duty and registration, insurance and interiors.
The figures here are for illustration; your lender’s offer letter gives the exact rate, fees and schedule.