Do you know who to calculate **principle and interest** part in your home loan’s EMI break up? Do you know how each EMI is distributed to principal and interest repayments? It is extremely important to have this knowledge because a lot of real life decisions like prepaying the loan, opting for the loan tenure and many more such aspects depend on how your EMI is structured.

**Basics of Home Loan EMI’s **

What happens in a general scenario? Loan is opted for from a Bank and you start paying your EMIs each month as contracted (see this excellent article on how EMI formula is derived). When you pay your EMIs, some part of it goes towards interest and remaining towards principal repayment. So each month you are reducing your loan by some extent and now as your loan have reduced, you will be paying less interest on your next instalment. In the same way, with each passing month, your loan gets paid by some amount and balancing amount keeps on reducing resulting in paying lesser interest month on month and year on year and the day comes when you fully close your loan. Note that your EMI is generally fixed and internally it’s worked out into ‘interest’ and ‘principal’ repayments.

However, even today, a lot of people have no understanding of the idea that in the early years of repaying the loan, interest component is very high as compared to principal repayment. The longer the tenure of the loan, the interest component will be higher than principal payments and also the rate at which the interest part will come down will also be lower, making sure that in the initial years most of the EMIs goes towards ‘Interest’ and not ‘principal’.

### Example of EMI payment

Lets say you take a HDC Home Loan of Rs 30 lacs for 20 yrs tenure, your EMI would be Rs 28,950/month. In the first EMI, the interest part would be Rs 25,000 and only Rs 3,950 will be the principal payment, which means out of total hdfc home loan of 30 lacs, only Rs 3,950 will be reduced in the first month and rest Rs 25,000 will go away in interest. Sounds disappointing? What is EMI disease ?

In the same way After 100 payments (8 yrs and 4 months), when you would be paying your 101st EMI of Rs 28,950, the interest part would still be as high as Rs 19,891 and the principal part would be Rs 9,060. Still disappointed? Now let’s fast forward towards the end, let’s take 200th payment. When you make your 200th EMI payment of Rs 28,950; this time your interest part would be very less at Rs 8,349 and principal would be Rs 20,601. So now, with all these examples I gave, you can see how interest part is very high in initial years. Let’s look at it from a different point now!

Just consider this- For the scenario above; If you keep paying your EMI’s for 2 yrs (24 payments), you will pay total of 6.94 lacs (24 x EMI) from your pocket, but your loan would just go down by 1.05 lacs! And your outstanding loan would be still 28.95 lacs. In the same way in 5 yrs even though you pay around 17.37 lacs (60 x EMI), your loan outstanding would be down by just 3.06 lacs and loan outstanding would be just Rs 26.94 lacs.

The chart below shows the breakup of interest and principal payment for each year for a 30 lacs loan for 20 yrs tenure assuming interest @10%. So each bar is broken into two parts, where green bar represents Interest part and orange bar represents principal part. It is clearly visible that how interest forms a major part of overall EMI in initial years and only in the later years principal part becomes high.

**Here is the actual breakup of the EMI in numbers**

**Pre-payment of long tenure loan**

A lot of investors opt for 15-20 yrs loan thinking that they will pre-pay the loan in next 4-6 yrs itself because of their salaries will rise or for some other reasons. In these cases, for the initial years they keep paying loan interest only and not a lot towards principal. When they prepay the loan, they end up paying a little lesser amount then original loan amount. Example, if you take a loan of 30 lacs for 20 yrs tenure at 10% p.a. and prepay the loan in 5 yrs itself, you will still end up paying 27 lacs as loan outstanding, even though you have already paid 17 lacs in EMI in last 5 yrs, Pre-payment penalty would be extra! But the positive side is that there might be a good appreciation in the house value itself.

So if you are taking loan for longer duration thinking that you would pre-pay the loan very soon, you need to rethink! This makes sense, once the worth of your house has gone up and there is a decent profit. A better option which I can think of is to pre-pay in small chunks each year along with your EMI’s from the start of the loan payment. It would make sure that you principal goes down in big chunks each month.

If you take short term loans, because of the shorter duration, the bigger chunk of the EMI is actually principal part, hence you can look forward to pre-pay the loan incase you wish to.

### Free Calculators for Loan Amortization

I have created and found out some loan amortization calculators which you can use for calculating your EMI’s and its breakup into principal and interest for each month.

- Download Excel version of Loan amortization calculator (created by me)
- Use this Advanced EMI calculator (copyright Manu NIIT)
- Download this multi variable EMI calculator (Source : Joe Verghese)
- Use the below embeded Loan EMI breakup calculator (direct link)

By now you must have got a clear understanding on loan amotization and how home loan EMI is broken into principle and interest component. Note that the asssumption for this article was that the loan is on “Monthly Reducing Balance”

sameer

Hi Manish,

Nice article, However I want to ask you a basic question/confusion that a layman has is prepay the loan or invest.

Also, how we can take into consideration income tax benefit while making above judgement i.e prpay or invest,

Thanks

Sameer

swapna

One of the best article I have read on home loans. You have explained interest math very clearly . The excel formats are very helpful.

Thanks for posting this

Manish Chauhan

Glad to know that swapna ..

Sudipto

Manish – First of all a nice article refreshing the basics.

I have a question on home loan applicable to me as below. Please comment on that.

I have an outstanding home loan from ICICI bank. With the recent rate change, the new rate applicable for MY loan is 9.75. However for a new loan their rate is 9.65%. In case I want this lower rate (lower by 0.1%) applied to my loan, I have to shell out 0.5% of my outstanding balance. Current situation is:-

18L Principal Outstanding @ EMI of 20881 @ For next 151 months

If I go for rate reduction to 9.65% now, then I have to shell out Rs 9000 now, which I was told would lead to reduction of duration by 2 months.

So this is where I need help in deciding the best course of action. I am spending 9000 now. Even if I assume I do a FD of Rs 9000 for 150 months at a compound interest of 8% compounded monthly – that comes to 25K after 150 months WHERE AS last 2 installment reduction means 20K * 2 –> 40K approx.

So looks like I SHOULD BE trying to get the better rate now by paying 9000. Did I miss anything ? What do you advise ?

Manish Chauhan

I dont think its a great deal . Note that the rate change applies generally by the end of the month. SO you will just get 1 month benefit.

Meghasyam

nice article as always..thank you Manish

Manish Chauhan

Glad to know that Meghasyam ..

Kumar

Manish, great article! Do we have an option to pay less EMI during construction period and move to a regular EMI from the time of occupation? My understanding is that we do not get any tax exemption during construction period.

Manish Chauhan

I dont think so . It will all depend on bank rules

Rahul

I would disagree to one aspect that, no matter when you repay, like in the above eg. even if you repay the loan after 5 years on 30L @ 10% interest anyway comes to 15L. Now saying that if I would not repay my loan waiting for property value upside or whatever I am taking future price risk plus additional burden of the interest cost the more I delay unless I have an investment opportunity of a rate higher than 10% for the next 15 years (until the date of maturity).

Hence, in my opinion its always better to pay off the loan as quickly as possible, keeping bare minimum of outstanding for tax benefits (around 20L)

Regards,

Rahul

Manish Chauhan

Hey Rahul

Thanks for sharing your experience with all of us. It was a great learning.

Manish

Arunkumar

Thanks Manish…..excellent article…

Manish Chauhan

Thanks for your comment Arunkumar

Nikhil kasbe

Nice article.

Can u show mathematically how principal and interest is calculated? I mean by formula.

Manish Chauhan

Will update the article with formulas

Praveen

Hello Manish,

Good article man…It cleared my all doubts for which I was running around bank people…

Manish Chauhan

Thanks for your comment Praveen

Mandeep

Dear Manish,

I am applying for personal loan of 2,50,000, for 5 years at 18.5% rate of Interet from axis bank.

Kindly confirm how do i calculate a Principle amount repayment in every EMI.

Rgrds

Mandeep

Manish Chauhan

You dont need to calculate it, You can just ask for amortization schedule from bank

Also check the calculators attached at the end of this article to understand how to calculate in excel

Umesh

Hi Manish,

I have a question after reading your article “How EMI’s Principle and Interest breakup is done”. I am a home loan customer and have been paying an EMI of 33000 for the last 5 years for a loan amount of ~32 lakhs. In the last 5 years, not a single rupee has reduced from the Principle. Every year when I receive the Provisional tax statement, there is nothing deducted from the Principle and full EMI is only deducted towards Interest. Is there a rule on these things that I can file a complaint against? or do banks have the right to divide the EMI as they want?

Manish Chauhan

Hi Umesh

You should immediately contact your bank and ask for the explanation. My worry is that, it seems like you are into pre-EMI payment schedule and you are just paying the interest part.

Manisha

Hello Manish

I know you may have answered this question many times..and I am lazy to ready all the comments/not able to process the information correctly for my case. Sorry for that.

I have a loan of 29.5 lac for 20 yrs for SBI max gain. I have paid EMI for 1 1/2 year @32,886. Now I want to repay my loan, for that I have written a letter to SBI. SBI is not very prompt in answering question over phone

1. Do I need to do anything apart from writing letter that I want to prepay towards -principal amount?

2. Can I do it via- NEFT(Adding Loan account -NOT over draft). If yes, how many times a year.

3. Is it advisable to prepay the loan in say 1-2 year time, considering I dont need money back.

Thanks.

Manish Chauhan

Hi Manisha

I suggest you visit the SBI branch and take up this matter. Then do what they tell you for prepayment.

Its generally not suggested to prepay so early because you dont benefit at all .

sirisha

my eyes r opened reading ur article,thank u

Manish Chauhan

Thanks for your comment sirisha

Sujatha

Excellent Article! Can understand the working of the Amortization Schedule very clearly! Thanks to the Author!

Manish Chauhan

Thanks