As a home loan borrower, you must be sure to calculate the interest on your home loan in advance to manage your financial budget around that for the duration of the loan. Calculating this EMI helps you better understand the interest expense, which you can then use to plan the rest of your expenses around.
In this blog, we will help you understand how to calculate home loan interest easily for your financial planning. But first, let us understand on what basis a home loan is calculated.
How Is A Home Loan Calculated?
Although it is calculated daily, you will be charged interest on your home loan at the end of each month during the tenure. Your bank determines the sum daily by taking the amount of the outstanding loan, multiplying it by the interest rate and then dividing it by 365 (or 366 if it’s a leap year).
At the end of the month, the daily interest for each day of the month is summed up together and charged to you.
How To Calculate Home Loan Interest
Below are the steps to calculate the interest on your home loan:
- The formula for calculating the daily interest on your home loan is as follows:
- P x R/100 x 365 [366 in case of leap year]
- In this formula:
- P is the principal loan amount
- R is the rate of the interest on a yearly basis
- Since the formula mentioned above was to calculate the daily interest on your home loan, here is how you Can convert that into monthly interest.
- Monthly interest = daily interest x the number of days in the month.
Let us see an example:
- A person takes a home loan of $300,000 for a term of 30 years with a standard rate of 5 percent per annum. First, we will find out the daily interest:
- 300,000 x [5/100] /365 = 41.09 [approximately]
- To calculate the monthly interest for, let us say, January, here is what will be done:
- 41.09 x 31 = 1,273.97
So, you will have to pay an interest of almost $ 1,274 for the month of January.
Factors Affecting Your Home Loan Interest
Your home loan interest amount can be influenced by various factors, such as:
- The rate of interest on home loans
- The total principal amount you borrow
- The cash rate of the Reserve Bank
- The amount of loan outstanding
- The number of days in a month
- The total term of your loan
- The repayment frequency.
And that is how to calculate home loan interest. The method is very simple once you understand what goes where, but be sure to convert every number and rate to a monthly basis.
If you need assistance with your home loan application, InvestorFi can help you. Call us on 1300 942 843 to get started.