An equated monthly installment, referred to as EMI, is a necessary part of availing a home loan or any other loans, but it can be tad difficult to estimate how much you can actually afford. A home loan EMI calculator can help borrowers estimate their monthly payments based on the price of the house, down payment, interest rate, loan tenure, and other expenses.
How Do Banks Calculate Home Loan Amount
A series of calculations takes place before banks decide on how much home loan an applicant can borrow, depending on factors including:
EMI/NMI ratio: Lenders determine the loan eligibility amount post deduction of income tax on the monthly salary and the remaining net monthly income (NMI). In other words, it is the maximum home loan amount an applicant can borrow based on their NMI minus the existing loan amount.
Most lenders have put a cap on the maximum limit on the EMI/NMI ratio. For instance, the State bank of India has put a cap on the limits for EMI/NMI ratio, as follows:
20% – Up to INR 60,000
25% – INR 60,000 to INR 1.20 lakh
30% – INR 1.20 lakh to INR 2 lakh
50% – INR 2 lakh to INR 5 lakh
55% – INR 5 lakh to INR 10 lakh
65% – Above INR 10 lakh.
Note: This percentage can be increased by adding a co-applicant while applying for a home loan.
Let’s learn how to calculate the EMI/NMI ratio with an example. If the applicant’s net monthly income is INR 75,000 post tax deduction, and the bank is offering 25% EMI/NMI ratio on that income slab, the maximum EMI amount he/she can opt for is 25% of INR 75,000 = INR 18,750.
However, if an applicant already has INR 5,000 existing EMI for other loans, then the maximum EMI amount he can opt further is INR 18,750 – INR 5,000 = INR 12,750
Loan-to-value (LTV) ratio: The LTV ratio is calculated after evaluating the value of the house and the maximum loan amount an applicant gets. Lenders generally pay 75% to 90% of the cost of the property, and the remaining amount has to be paid by the applicant on an up-front basis, also known as the down payment.
For example, if the value of the house is INR 30 lakh and the bank’s LTV ratio is 75%, the maximum loan amount the applicant gets is 75% of INR 30 lakh = INR 22.5 lakh.
Formula To Calculate Home Loan EMI
Once the applicant has figured out how much loan can be borrowed based on the EMI/NMI facor, as explained above, then EMI, which refers to equated monthly installment, plays a crucial role. EMI is a repayment of the principal amount plus the interest amount on the outstanding home loan. Let’s understand the EMI calculation with an example:
If a person gets a home loan of INR 10 lakh at an annual interest rate of 7.2% for a tenure of 10 years (30 years is the maximum tenor for home loan), then the EMI will be calculated using the following formula:
P x R x (1+R)^N / [(1+R)^N-1]
P: Principal loan amount = INR 10,000,00
N: Loan tenure in months = 120 months
R: Interest rate per month [7.2/12/100] = 0.006
EMI= INR 10,00,000 * 0.006 * (1 + 0.006)120 / ((1 + 0.006)120 – 1) = INR 11,714.
How EMI Calculation Helps to Repay Home Loan?
When you learn to calculate the EMI on your own, it helps you make pre-informed decisions whether or not you want to apply for a home loan on the basis of your current personal finance. It helps an applicant to calculate the monthly outflow of funds that goes towards the housing loan as well as the down payment required to purchase your dream house. Therefore, knowing the method of calculating EMI is crucial to know your home loan eligibility, and hence avoid unnecessary expenses that go into planning to buy or build a house.
How do Banks Calculate Interest Rate on EMI?
Lenders, finance or banking institutions usually charge floating rate of interest rates on home loans, though fixed rate is also available.
A fixed rate of interest on loans is fixed for the overall tenure of the loan while floating rate is calculated as per the “base rate” (standard lending rate of the bank), or the lender’s repo-linked loan rate (RLLR) or marginal cost of fund-based lending rate (MCLR), plus the spread (difference in interest rates that a bank pays to a depositor and receives from loan borrowed to a customer).
The RoI on the floating rate on home loans for every bank changes as per the RBI’s change in repo rate. In the floating rate, the change is, however, reflected after the “reset period” when the interest rate on your EMI is subjected to revisions. Here are the major difference between fixed rate and floating rate of interest:
| Fixed Rate of Interest | Floating Rate of Interest |
|---|---|
| Fixed rate of interest for the entire term or part of the loan term. | Interest rates move up or down as per banks and the change in RBI’s policy rate. |
| Interest rate is higher. | Interest rate is lower than fixed rate. |
| The prepayment penalty is higher. | Usually, there’s no prepayment penalty. |
| Offer lower chances of paying less when rates fall. | The rate is linked to the repo rate. |
Interest Rate Charged by Banks on Home Loan EMI
Public and private sector banks provide home loans upon a certain rate of interest (ROI) on equated monthly installment (EMI). One’s income, credit history, value of the property, EMI/NMI ratio plays a vital role in getting an attractive ROI on the borrowed sum.
The policy repo rate hike by the Reserve Bank of India (RBI) in Oct. 2022 to 6.25% has led many banks to increase their interest rate on home loans. Currently the interest rate on home loans starts from 8% onwards. Remember, women borrowers are offered up to 0.50 bps lower rate of interest on the borrowed sum.
You can access the current home loan interest rate (click here) to understand the types of plan that may suit your personal finance needs.
Frequently Asked Questions (FAQs)
What is an EMI?
EMI, or equated monthly installment, is an amount you pay to the bank on a specific date every month till the time the outstanding loan amount is cleared. The EMI amount, like the method mentioned above, is calculated taking the principal amount, interest rate and tenor for availing a loan.
What is the difference between fixed rate and floating rate of interest?
Fixed rate of interest does not change during the loan tenure and the EMI will also remain fixed. Whereas, the floating rate of interest is linked to an external benchmark rate and changes from time to time in accordance with the RBI’s change in repo rate.
What is a down payment?
Lenders agree to pay around up to 90% of the cost of the house and the remaining balance has to be paid by the applicant on an up-front basis, which is called the down payment.
What is the average tenure of a home loan?
Home loan tenure ranges between three to thirty years as the loan involves a large sum of money.
What are the eligibility criteria for availing a home loan?
Following are the eligibility conditions:
• The applicant should be an Indian resident or an NRI.
• Age should be above 18 years.
• Loan repayment should be up to the age of 60 to 70 years, depending on banks.
How does my salary influence my home loan amount?
Lenders determine the loan eligibility amount post deduction of income tax on the monthly salary and the remaining net monthly income (NMI). The EMI/NMI ratio varies in the range of 20% to 70% for different net annual income slabs.
How much home loan can I get?
Lenders generally pay 75% to 90% LTV of the cost of the property, which is calculated after evaluating the value of the house.
What are the factors that determine the home loan EMI?
The total home loan amount is based on factors, including location of the property, its value, net monthly income of the applicant, credit score, EMI/NMI ratio, to name a few.
How much tax rebate can I get by taking a home loan?
There are various tax exemptions on home loans for borrowers under Section 24, Section 80C, Section 80EE under the Income Tax Act.
What will be my home loan EMI?
Once the applicant has figured out how much loan can be borrowed based on the EMI/NMI facor, as explained above, then EMI plays a crucial role in the repayment of the principal amount plus the interest amount on the outstanding home loan.
