How EMI’s Principle & Interest Splits in a Home Loan

When you avail a home loan you know that you would have to pay EMIs to pay off the loan you have availed. The EMIs depend on the amount of loan, the applicable rate of interest and the term over which you choose to repay the loan. If any of these factors change the EMI changes too. While you make sure that you settle on affordable, Home loan EMI calculator do you know that the EMIs consist of your home loan interest and principle?

When a loan EMI is calculated, it consists of two parts, the interest payable every month and the principal repaid. The EMI remains constant and the interest and principal repaid changes over the repayment tenure. The interest payable is calculated on the outstanding balance of the loan. When the loan tenure starts, the entire loan amount is outstanding. As a result, in the initial years of repayment, a major portion of the EMI consists of interest paid and only a little portion is the principal repaid. As the loan tenure increases the outstanding loan amount goes down thereby reducing the interest paid and increasing the principal repaid. Thus, in the latter years of loan, the EMI primarily consists of the principal amount as the interest reduces.

Let’s see how the EMI splits up over the loan tenure –

Suppose a home loan of INR 25 lakhs is taken at an interest rate of 8.75% per annum for a term of 20 years. The EMI works out to INR 22, 092.78 and 240 EMIs would be paid to pay off the loan. Here’s how the EMI’s components would change over the term of the loan –

Number of EMI paid EMI amount Interest paid Principal paid Outstanding loan amount
61 (After 5 completed years) 22,092.78 16,118.19 5974.59 22,04,520.02
121 (after 10 completed years) 22,092.78 12,853.83 9238.95 17,53,572.12
181 (after 15 completed years) 22,092.78 7805.91 14,286.87 10,56,238.15
229 (after 19 completed years) 22,092.78 1844.48 20,248.30 232,708.65

(Source for calculation – https://www.jagoinvestor.com/2011/04/loan-amortization-emi.html )

So, as the loan tenure progresses, the EMIs contain more of the principal and less of the interest.

Prepayment of the loan and EMIs

Many of you wish to prepay a portion of your home loan to reduce the loan burden. While prepayment definitely helps in reduction of the loan, what you need to know is the term when prepayment is beneficial. In the initial period of the loan, when the EMIs contain majorly the interest payable on the loan, prepayment would go towards the payment of the interest only. The actual principal amount would not reduce considerably. So, prepayment in the later years of the loan makes sense. Alternatively, you can also choose prepaying a part of the loan with every EMI to reduce the principal and, subsequently, the interest.

So, before availing a home loan and working out the EMIs, know how the EMIs are put to use in repaying your home loan. Understand the EMI split to understand how your loan amortization schedule works.

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