Do you know how home loan EMI is calculated ?

Its not just about Home loan , it can be any loan EMI
. In this post we will learn how do we calculate monthly EMI for home Loan and how increasing
Tenure does not help much after a certain point. A lot of people do not know that increasing the tenure
only leads to increase in Interest amount payable and nothing else . The decrease in EMI is not
proportional to the increase in Loan tenure . In Housing Finance , Equated Monthly Installments (EMI)
refers to the monthly payment towards interest and principal made by a borrower to a lender. EMI is
calculated using a formula that considers .
• Loan Amount
• Interest Rate
• Loan Period

Where,
L = Loan amount
i = Interest Rate (rate per annum divided by 12)
^ = to the power of
N = loan period in months

Example
Assuming a loan of Rs 1 Lakh at 11 percent per annum , repayable in 15 years, the EMI calculation
using the formula will be :
EMI = (100000 x .00916) x ((1+.00916)^180 ) / ([(1+.00916)^180] – 1)

====> 916 X (5.161846 / 4.161846)

EMI = Rs 1,136

Note at i = 11 percent / 12 = .11/12 = .00916

Q. How much benefit we get by increasing the Tenure of the Loan. Considering a Loan of Rs 30
Lacs at 12% interest rate.
Ans : I did a bit of my so called “mathematical skills” … and found out that EMI is of form
EMI(n) = C1 X C2^n / C2^n-1 , where
C1 = L * i
C2 = 1+i

So the difference in the EMI value for n+1 and n is nothing but
by a bit of caculation i got :
EMI(n) – EMI(n+1) = C1 x (C2^2n – C2^n) / (C2^2n – 1)
and when n becomes very large … and appling limit, we get
Lim C1 x (C2^2n – C2^n) / (C2^2n – 1)
-> Inf

=>

Lim C1 / C2^n
n->Inf

and as C2 > 1 (C2 = 1+i)

=>

Lim C1/C2^n = 0
n->Inf

Or in other words if we differentiate the EMI formula … we get a constant …

It shows and proves that the difference in EMI value is not very significant copmpared to the change in
tenure and at one stage its almost of no gain to increase the tenure.
To show this argument : i would like to present an example, considering my old question:
Q. How much benefit we get by increasing the Tenure of the Loan. Considering a Loan of Rs 30
Lacs at 12% interest rate.
I am listing down the EMI value for different Tenures from 10 years to 100 years
Tenure EMI Differnce in EMI when tenure increased by 5 years
10 43041 7036
15 36005 2972
20 33032 1435
25 31596 738
30 30858 391
35 30466. 211
40 30254 115
45 30139 63
50 30076 34
55 30042 18
60 30023 10
65 30012 5
70 30007 3
75 30003 1
80 30002 0.95
85 30001.17 0.52
90 30000.64 0.29
95 30000.35 0.159

What it tells us is that it’s almost useless to extend the tenure after some time …
EMI formula

Question: What is the formula to be applied to calculate the EMI of housing loan for different rests?

K.R. Narasimhan Chennai

Our panelist, T. M. Aaditiyaa, Chartered Accountant, replies:

The formula for calculation of EMI given the loan, term and interest rate is:

EMI = (p*r) (1+r)^n

___________

(1+r)^n - 1

p = principal (amount of loan), r = rate of interest per instalment period, i.e., if interest is 12% p.a. r =
1, n = no. of instalments in the tenure, ^ denotes whole to the power. Alternatively, the reader can use
`Calculate EMI function' in EXCEL spread sheet.