Summary – Calculating your home loan EMI accurately is important for better financial planning. Learn about the home loan calculation formula and the best way to use a free home loan calculator in this article.
EMI, or Equated Monthly Instalment, refers to the amount a borrower pays to a lender for availing of a home loan. EMI is a liability, which is why proper financial planning is crucial.
The EMI of a home loan depends on multiple factors, such as the borrower’s net monthly income, the loan-to-value ratio, the loan amount, the term, the interest rate, the down payment, etc. Read on to learn more.
Factors Lenders Consider to Determine Home Loan EMI in India
Financial institutions in India conduct many calculations to determine home loan EMIs, as given below.
The Ratio of EMI to NMI
The first figure lenders need to calculate a home loan EMI is the borrower’s net monthly income (NMI). The NMI is calculated after deducting income tax, professional tax, provident fund, and other deductions from the gross monthly salary.
The higher the NMI, the more the loan amount will be.
Financial institutions usually have a slab based on which they determine the EMI amount. For instance, if a borrower’s NMI is Rs. 60,000 after all deductions and the EMI/NMI ratio offered by the lender is 20%, the maximum EMI can be Rs. 12,000.
LTV or Loan-to-Value ratio refers to the loan amount the lender offers vis-à-vis the actual cost of the house’s construction or purchase. Like the EMI-NMI ratio, LTV also depends on the lender.
For example, if your house construction/ purchase cost is Rs. 50 lakh and your lender offers an LTV of 90%, the actual loan amount will be Rs. 45 lakhs. In this case, the mandatory down payment amount will be 10% of the house construction/ purchase cost, or Rs. 5 lakhs.
While a 10% down payment is the minimum and mandatory, sensible borrowers often make a higher down payment. If you make a larger down payment, your lender may offer a hefty discount, lowering your EMI.
Besides the EMI-NMI ratio and LTV ratio, financial institutions in India also consider the prevailing interest rate, the nature of the borrower’s income, the term, and other factors to determine the home loan EMI.
The Formula Used by a Home Loan Calculator
Modern-day lenders like PNB Housing have made home loan EMI calculations extremely easy. You can visit PNB Housing’s website, open the home loan calculator, enter the inputs, and get an accurate estimate within seconds.
The Best Way to Calculate Home Loan EMI
Although the home loan EMI calculation formula is fairly easy to understand, you may waste precious time to ensure accuracy. A free home loan calculator can provide accurate estimates within seconds.
All you need to do is to open the calculator and enter the following inputs in the appropriate boxes.
- Principal – The principal refers to the amount you want to borrow from the lender. The interest rate and EMI amount depend primarily on the principal.
- Interest Rate – Home loan interest rates depend on the prevailing MCLR (Marginal Cost of Lending Rate) set by the Reserve Bank of India.
- Tenure – Home loan repayment tenure usually ranges between five and thirty years. You can choose your tenure as per your repayment capacity.
Once the aforementioned figures are entered, the home loan calculator will display the EMI amount.
Using a home loan calculator is imperative when you want to make an informed decision while availing of a home loan. Ensure the loan amount and EMI are within your budget, as a high EMI might stress your finances.