How to Calculate Interest on Mortgage Loan

The interest levied on mortgage loans varies from lender to lender as different lenders have different policies on calculating the interest on loan schemes. Read on to know more about how you can calculate the interest on your mortgage loan.

If you are looking to apply for a loan against property or the mortgage loan, one of the most critical factors you must consider is the interest rate levied by the lender. The lenders generally decide the interest rate based on the borrower’s profile, the amount applied for, the duration of the loan and the prevailing market rate. The interest rates are generally of two types – fixed and floating.

In a fixed interest loan scheme, the interest rate remains the same throughout the loan tenure. This means that your EMI will remain the same. In the floating interest rate, the interest tends to vary based on the market fluctuations and the prevailing economic conditions. So, if you opt for floating interest rate, the EMI amount may vary; if the market condition is favourable, you get the benefit of lower interest rate and vice-versa.

Factors that affect the interest payment on the mortgage loan

The mortgage interest rate

This is the rate at which the lender charges the interest on your home loan or loan against property. Even a small difference in the interest rate can help you save thousands of rupees in the long run. Make sure that you find the best lender that offers the loan at a competitive interest rate.

Cost of borrowing for a lender

The interest on LAP that the lender charges are linked to the cost at which the lender borrows funds. The cost of funds for a bank at floating rates is determined by the market forces and the central bank i.e.Reserve Bank of India…

The amount borrowed

The loan amount you apply for has a significant impact on your interest repayment. The higher the amount you borrow, the higher your interest payment will be  For example, assuming the interest rate charged by the lender is 7.5%, your payout for a loan of Rs. 10 lakhs will be higher than the payout for a loan of Rs. 5 lakhs.

The loan duration

The loan tenure you choose will influence the amount of interest you pay. You should opt for a loan for a shorter period as it will minimise your interest payout and help you close the loan account quickly.

Interest-only or principal and interest payment

Another important factor that affects the interest payment on your mortgage loan is whether your EMI includes both the principal amount and the interest or only the interest. In India, paying the interest and the principal amount is the most common way to pay off a home loan. However, there some loan schemes that allow you to pay off only the interest component for a specified period.

How is interest on mortgage loan calculated?

The lenders in India usually calculate the interest on the mortgage loan monthly. The lender, at the end of every month, will consider the outstanding amount and multiply it by the interest rate levied and divide the amount by 12.

For example, if your outstanding loan amount is 5 lakh Rupees and the interest rate applied on the loan is 5%, your interest for one month will be calculated as follows:

500000 x 0.05 / 12 = 2088.33

The key to managing the interest payment on your loan against property is to choose the right lender that offers the best rate and assures good service.