| No. of Months | Opening Principal | EMI | Interest | Principal | Closing Principal |
| 1 | 10,00,000 | 8,679 | 7,083 | 1,596 | 9,98,404 |
| 2 | 9,98,404 | 8,679 | 7,072 | 1,607 | 9,96,797 |
| 3 | 9,96,797 | 8,679 | 7,061 | 1,618 | 9,95,179 |
| 4 | 9,95,179 | 8,679 | 7,049 | 1,630 | 9,93,549 |
| 5 | 9,93,549 | 8,679 | 7,038 | 1,641 | 9,91,908 |
| 121 | 6,99,794 | 8,679 | 4,957 | 3,722 | 6,96,072 |
| 122 | 6,96,072 | 8,679 | 4,931 | 3,748 | 6,92,324 |
| 123 | 6,92,324 | 8,679 | 4,904 | 3,775 | 6,88,549 |
| 124 | 6,88,549 | 8,679 | 4,877 | 3,802 | 6,84,747 |
| 125 | 6,84,747 | 8,679 | 4,850 | 3,829 | 6,80,918 |
| 236 | 42,023 | 8,679 | 298 | 8,381 | 33,642 |
| 237 | 33,642 | 8,679 | 238 | 8,441 | 25,201 |
| 238 | 25,201 | 8,679 | 179 | 8,500 | 16,701 |
| 239 | 16,701 | 8,679 | 118 | 8,561 | 8,140 |
| 240 | 8,140 | 8,679 | 58 | 8,621 | -481 |
Home loans are repaid in EMIs (Equated Monthly Installments) comprising both interest charged on outstanding loan amount and principal amount.
If interest rate remains constant (fixed rate loan), the EMI will remain constant for the entire loan repayment period, whereas the components of interest and principal vary from month to month.
To start with, as loan amount is high, the interest component is higher in the EMI and principal recovery is much less. As repayment tenure progresses over the years, outstanding loan amount gets reduced and as such in the EMI, the principal recovery increases and interest charged will reduce.
Let us take example of a loan amount of Rs. 10 lakh, sanctioned for a period of 20 years (240 EMIs) at fixed interest of 8.5% pa, the EMI shall be Rs. 8,679.
By simple calculation, in the first EMI, interest charged shall be on Rs. 10 lakh @ 8.5% pa (i.e., 8.5/12 = 0.7083% X 10,00,000), amounting to Rs. 7,083 and the balance from EMI (8,679 – 7,083 = 1,596), will be principal loan amount recovered. Hence outstanding loan for the second month shall be 10,00,000 – Rs. 1,596 = Rs. 998,404.
Now for second month, interest shall be charged on outstanding loan of Rs. 998,404, which will be less that first month and principal recovery will be slightly more. In the same way, the loan will be repaid over 240 EMIs.
Please refer to the graphic, which shows interest and principal components during first five months, during 11th year (121 months onward) and during last 5 months, which will give clear understanding of loan repayment schedule, which is also known as loan amortization.
Amortization charts are also available on the Internet and on Apps.
You will note that on a loan of Rs. 10 Lakh, you will end up paying interest of Rs. 10,82,500 apx., at interest rate of 8.5% pa. If interest rate is higher, total interest payable will be much higher. The credit history shows that, on an average, the interest rate could be 10%, in such a case the total interest payable shall be Rs. 13,15,500 apx. But looking at the long tenure and reduction in Rupee value (inflation), the total interest payable is not very high. Over and above there are income tax benefits available on home loan repayment, which will effectively reduce the interest rate.
Further to reduce the interest burden, the borrower can make bulk prepayments during the loan repayment period. Such prepayments will be accounted as principal recovery and as such the pending loan tenure will automatically reduce, which means the total interest payable will significantly reduce.
One can also request for reducing EMI and keeping the balance repayment tenure same as earlier, at the time of making bulk prepayment.
It may be noted that if loan is availed on fixed rate scheme, there will be prepayment charges and if availed on floating/variable rate scheme, there may not be prepayment charges.
Rajendra Deshpande, Managing Director, PropSeva®
Chartered Engineer Mortgage Banker