How is EMI Calculated? Tips to Optimise Your EMI Amount
13 Feb 2024

How is EMI Calculated? Tips to Optimise Your EMI Amount

13 Feb 2024

The journey to homeownership is a monumental pursuit, often requiring the assistance of a home loan. Central to this financial commitment is the Equated Monthly Installment (EMI), a recurring payment that encompasses both principal and interest. While the concept might initially seem daunting, breaking down the EMI calculation unveils a logical and understandable process.

In this exploration, we will demystify the intricacies of calculating a home loan EMI, unraveling the formula into digestible components. You can confidently navigate the financial landscape by understanding the interplay between the principal amount, interest rate, and loan tenure. Furthermore, we will delve into strategic approaches to optimize your EMI, ensuring that your path to homeownership is affordable and financially astute.

Join us as we decode the complexities of home loan EMIs, arming you with all the information you need to make decisions that align with your financial goals. Whether you're a first-time homebuyer or a seasoned property investor, this comprehensive guide aims to provide clarity and insights into home loan EMIs. Let's embark on this financial exploration together and pave the way for a more secure and optimized homeownership experience.

The Main Factors Affecting Your Home Loan EMI:

Bureau/ Credit Score:

This three-digit number is like a magic number that quantifies your financial intent, that is, your financial credibility. Banks, HDFCs, and HFCs use credit scores as a critical element when evaluating any home loan application. The better your credit score, the less risky your profile seems as you are considered to be "creditworthy," capable of and with the intent of making timely repayments. Credit scores above 750 typically unlock the best loan offers.

Income and Employment Type:

Income is the main factor showcasing your capability to repay the home loan you are applying for. A good income from a stable source puts you in a better place to get a loan with lower interest rates. Lenders look at monthly income, the type of employment (salaried or self-employed), the nature of your job or business, etc., while defining the risk level of your profile, which directly influences the amount and ROI you'll qualify for. A steady income and stable job history increase your chances of getting your desired home financing offers.

Debt-to-income Ratio:

This is the ratio of monthly debts/ financial obligations to monthly income. This is used to determine your repayment capacity. Your eligibility can be compromised if you already have high financial obligations. (Read our comprehensive guide on understanding home loans). Try to maintain a low DTI ratio to get better loan offers while applying for a home loan. You can do this by paying off existing debts and avoiding new ones.

Down Payment:

The initial amount you pay towards a property's purchase price is called the 'Down Payment.' Given how large the ticket sizes can be in home loans, lenders finance a significant portion of the property cost. You can show them your financial ability and commitment towards faster EMI payments by making a substantial down payment. A more significant down payment strengthens your profile and reduces the required loan amount. Hence, it improves your eligibility while reducing the burden of monthly loan repayments.

Loan Tenure:

The loan tenure defines the duration you need to repay your Home Loan. In housing finance loans, tenures typically vary from 10-20 years, while the max can go up to 30 years in many banks (depending on your current age and age at loan maturity). Longer tenures result in more affordable EMIs and increase the overall interest cost. Shorter tenures reduce the interest burden but result in higher EMIs. Understanding this trade-off is essential as it helps you balance affordability and eligibility.

Learn more about eligibility factors in Ambak's Understanding Home Loan Eligibility blog: A Comprehensive Guide.

The EMI Formula:

The EMI calculation may seem complex, but it can be simplified into three main components:

Principal Loan Amount (P): This is the total amount you borrow from the lender to buy your home. It is the actual cost of the property minus the down payment you make.

Monthly Interest Rate (r): The annual interest rate is divided by 12 to get the monthly rate. For example, if the annual interest rate is 6%, the monthly interest rate (r) would be 612 = 0.5%. To know more about this and how this is calculated, check <link to #9>.

Loan Tenure in Months (n): The loan tenure is the number of months you will repay the loan. If the loan tenure is 20 years, n would be 20×12=240 months.

Putting it All Together:

EMI=P r (1 + r)n(1 + r)n - 1

Let's break down the steps:

Calculate Monthly Interest Rate (r): Convert the annual interest rate to a decimal and divide it by 12. For example, if the annual rate is 6%, the monthly interest rate (r) would be 0.06÷12 = 0.005

Calculate (1+r)n: Raise the value (1+r)to the power of n (the number of months).

Calculate (1+r)n - 1: Subtract 1 from the result obtained in the previous step.

Calculate the Final EMI: Multiply the principal amount (P) by the monthly interest rate (r), and then multiply the result by (1+r)n. Finally, divide this by (1+r)n - 1


Let's say you borrow ₹2,00,000 for 20 years at an annual interest rate of 6%.

P = 2,00,000 r = 0.0612 = 0.005 n = 20×12 = 240
EMI=2,00,000 0.005 (1.005)240(1.005)240-1

By plugging in these values, you can calculate the EMI.

Can My Home Loan EMI Amount Change During The Loan Tenure?

Although your housing loan Equated Monthly Instalment (EMI) is typically fixed, it may vary over the loan duration due to specific circumstances outlined below:

1. Opting for flexible EMIs such as step-up or step-down property loans can change your housing loan EMI. With step-up loans, your EMI gradually increases throughout the tenure, whereas step-down loans see a decrease in EMIs over time.

2. For partly disbursed loans, pre-EMIs increase with each disbursement.

3. Loan prepayment also impacts your home loan EMI. You can either decrease the EMI for the same loan tenure or shorten the loan tenure while maintaining constant EMIs. The latter option is more advantageous as it results in lower interest payments. Utilize a housing loan EMI calculator to determine the amount saved on interest.

4. Changes in floating interest rates affect the floating rate of interest. If the floating rate increases, the lender typically extends the loan tenure while keeping the EMI constant. The bank may increase your housing loan EMI if the new tenure exceeds the maximum permissible period.

Optimizing Home Loan EMIs:

Cracking the Right Loan Tenure:

The loan tenure significantly affects your EMI amount. A longer tenure reduces the monthly burden but increases the total interest paid over the loan's lifetime. Conversely, a shorter tenure implies higher EMIs but less interest paid. Assess your financial capability and choose a tenure that balances manageable EMIs and minimizes interest payments.

Making a Higher Upfront Payment:

A larger down payment reduces the principal amount, resulting in lower EMIs. It also signifies lower interest payments over the loan tenure. Aim for a substantial down payment to alleviate the financial strain of higher EMIs.

Selecting the Appropriate Interest Rate:

Home loans may offer fixed or floating interest rates. While fixed rates provide stability, floating rates may be more economical in the long run if interest rates decrease. Evaluate your risk tolerance and financial goals when choosing between fixed and floating interest rates.

Considering Part-Prepayments:

Making occasional part-prepayments towards the principal can substantially reduce the outstanding amount and, consequently, the interest payable. Check with your lender about any prepayment charges and consider making extra payments whenever possible.

Regularly Reviewing and Refinancing:

Keep an eye on interest rate trends. If there's a significant drop in interest rates, consider refinancing your home loan to capitalize on lower rates. However, consider associated costs and ensure that the overall savings justify the refinancing process.

Maintain a Good Credit Score:

A healthy credit score often leads to more favorable interest rates. Regularly monitor your credit report, promptly address any discrepancies, and ensure timely repayment of all debts to maintain or improve your credit score.

Choosing a Home Loan Balance Transfer:

You can move your remaining loan balance to lenders providing lower home loan interest rates, extended loan durations, or both. Nevertheless, before committing to a home loan balance transfer, conduct a thorough cost-benefit assessment to confirm that the savings in interest surpass the transfer expenses. Additionally, leverage an online home loan EMI calculator to precisely gauge the potential reduction in your EMIs with a reduced home loan rate. The Ambak EMI calculator is Coming Soon, too!

The Bottom Line:

Understanding the components of the EMI formula empowers you to make informed decisions about your home loan. Adjusting variables such as loan tenure, down payment, and interest rate allows you to tailor your EMI to suit your financial capacity and goals. Always leverage online EMI calculators and seek guidance from financial experts to ensure you make well-informed decisions about your home loan. To know more about the do's and don'ts of getting a home loan, check the blog on home loan eligibility.