How Home Loan Interest is Calculated
Understanding how interest is calculated helps you optimize your home loan repayment strategy.
Reducing Balance Method
Most home loans in India use the reducing balance method, where interest is calculated on the outstanding principal:
- Interest = Outstanding Principal × Monthly Rate
- As you pay principal, interest decreases
- More of your EMI goes toward principal over time
- This is the most borrower-friendly method
EBLR (External Benchmark Linked Rate)
Since 2019, RBI has mandated that floating rate loans be linked to external benchmarks:
- RBI Repo Rate (most common)
- Government Bond Yields
- Your Rate = EBLR + Spread
- Spread remains constant during tenure
Interest Calculation Example
For a ₹40 lakh loan at 7.2%:
- First month interest: ₹40,00,000 × 0.6% = ₹24,000
- After first EMI of ₹31,537, principal reduces by ₹7,537
- Second month interest: ₹39,92,463 × 0.6% = ₹23,955
- Interest decreases as principal reduces
Disclaimer: This guide is for educational purposes only. Actual interest calculation may vary by lender.