The formula every bank uses, a worked home-loan example, and the prepayment maths that can take years off your loan.
EMI = P × r × (1 + r)n ÷ ((1 + r)n − 1)
P is the loan amount, r the monthly interest rate (annual rate ÷ 12 ÷ 100) and n the number of monthly instalments. ₹10 lakh at 8.5% for 20 years gives an EMI of ₹8,678.
At 8.5% for 20 years, r = 0.0070833 and n = 240. The EMI is ₹21,696. Over 240 months you pay about ₹52.07 lakh, so total interest is roughly ₹27.07 lakh — more than the amount borrowed.
| Year | Principal repaid | Interest paid |
|---|---|---|
| 1 | ₹49,756 | ₹2,10,591 |
| 10 | ₹1,06,637 | ₹1,53,710 |
| 20 | ₹2,48,746 | ₹11,601 |
Interest is charged on the outstanding balance, which is largest at the start. In year one of the example above, over 80% of what you pay is interest. That is also why prepayments made early have the biggest effect.
Adding just ₹5,000 a month to the ₹21,696 EMI closes the loan in about 12.9 years instead of 20 and saves about ₹10.9 lakh of interest. Most lenders reduce the tenure (not the EMI) when you prepay, which saves the most. Floating-rate home loans taken by individuals have no prepayment penalty.
A flat rate charges interest on the original amount for the whole term. A 12% flat rate costs roughly the same as 21–22% on a reducing balance. Always convert before comparing personal, vehicle or business loan offers.
