Home Loan Calculator:
How to calculate EMI?
The mathematical formula for calculating EMIs is:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
Where,
P = Principal or loan amount,
R = Interest rate per month (the annual interest rate is divided by 12 to get the monthly interest rate), and
N = Number of monthly instalments or loan tenure in months.
Let’s understand this with an example:
Mr. Sharma has taken a home loan amount of Rs.5,000,000 (Principal amount or P). The rate of interest (R) is 8.5% p.a. and the loan tenure (N) is 20 years.
P = 5,000,000
R = 8.5%
N = 20 years
Interest Rate Applied = 8.5%
Monthly EMI = Rs. 43,391
EMI paid for the year = Rs. 43,391 * 12= Rs 520,692
Total interest payable over the loan tenure = Rs.54,13,878
Total amount payable = Rs.1,04,13,878
Mr. Sharma will do well to pre-pay the loan amount at regular intervals and thereby reduce the overall interest amount payable.
How can a calculator help?
Buying a home is one of the biggest financial decisions for most of us. It is prudent to check the various financing options available in the market before you decide. That’s’ where Finwisely can help you.
In the repayment cycle, the interest amount is always higher than the principal amount during the initial few years. So, try and take a loan for a lower tenure if you can manage your expenses. You can also pre-pay your loan at frequent intervals to reduce the outstanding, tenure or EMI. If you get large sums as bonus as part of your salary or a sudden spurt in income from business, make the best use of them by pre-paying the home loan.
Do keep in mind that you will incur other costs like property taxes, property insurance, maintenance charges, charges for utilities (electricity, water, gas) etc. So, keep a cushion amount towards these costs. Ideally, your home loan EMI and related expenses should not exceed 35% - 40% of your monthly income. Your combined EMIs of all your loans should not exceed 45-50% of your total income.
You can play around with the home loan calculator to see how much EMI you need to pay by varying the interest rates and loan tenures. This will give you an idea on how much you can afford. Knowing how much you can afford can help you take financially sound next steps. The last thing you want to do is jump into a home loan that’s too expensive for your budget, even if a financial institution is willing to lend you the money.
What is Loan to Value (LTV) ratio?
Loan to Value ratio is a percentage or proportion of the property value that a financial institution is willing to finance through a loan. This ratio is used by financial institutions (FIs) to assess their risk in lending a home loan to a borrower. The core purpose of using LTV ratio is to ensure that they do not lend an amount higher than the actual property price.
If the LTV increases, the perceived risk of borrower defaulting increases.
Loan-to-Value is calculated as follows:
LTV ratio in percentage = (Amount borrowed / Value of property) x 100.
In the above example wherein Mr.Rajesh has taken a home loan of Rs.50 lakhs, the property value was Rs.65 lakhs.
In this case, the banks LTV ratio is Rs. 50 lakhs / Rs. 65 lakhs * 100 = 77%.
As per RBI norms, the bank can lend upto 80% of the property value for a loan value of between Rs.30 lakhs - Rs. 75 lakhs. As a borrower, Mr.Rajesh can borrow upto Rs. 52 lakhs if he desires to.
A lower LTV ratio is better for the borrower
The more amount that a borrower puts as down payment, the lower is the loan amount required on the property and therefore, lesser risk for the FI.
This reduces the LTV ratio and with lower LTV ratio, the borrower can negotiate for lower interest rates and higher loan tenure if desired.
