Jun 13, 2023

Real Estate in India: Understanding Equated Monthly Instalments (EMIs)

by Godrej Properties Limited

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Real Estate And EMIs in India

Equated Monthly Instalments (EMIs) are payments made by a borrower to a lender on a set date that includes both principal and interest. In India, EMIs are often utilised to finance large-ticket purchases, such as homes, vehicles, and appliances. This piece will examine how EMIs operate and how they are computed in real estate.

A-Z Of Real Estate EMI's

1. How are EMIs calculated?

The EMI amount is calculated using a formula considering the loan amount, interest rate, and loan tenure. The formula used to calculate EMIs is:

EMI = [P x R x (1+R)^N]/[(1+R)^N-1]

P is the loan amount, R is the monthly interest rate, and N is the loan tenure in months.

For example, if you take a home loan of Rs. 50 lakhs at an interest rate of 8% per annum for a tenure of 20 years; the EMI will be Rs. 43,391.

2. Prepaying The Loan

Prepaying the loan can help save a significant amount of money in the long run. When a borrower prepays the loan, they reduce the principal amount, reducing the interest component. It means that the borrower will pay less interest over the loan tenure, thereby reducing the overall cost of the loan.

It is important to note that some lenders charge a prepayment penalty if the borrower prepays the loan before the end of the loan tenure. Therefore, borrowers should check with their lenders for prepayment penalties before paying their loans.
 

3. Factors Affecting EMIs

Several factors affect the EMI amount. The loan amount, interest rate, and loan tenure are the primary factors that influence the EMI amount. However, other factors, such as the borrower's credit score, age, and income, also play a role in determining the EMI amount.

4. Choosing The Right EMI

It is essential to choose the right EMI when taking a home loan. Borrowers must ensure that the EMI amount is affordable and within their budget. Typically, lenders allow borrowers to choose their EMI amount based on their financial situation. Borrowers can choose a higher EMI amount if they have a higher income or can opt for a lower EMI amount if they have a lower income.

Final Statement

In conclusion, understanding EMIs is crucial when taking a home loan in India. EMIs are a borrower's fixed payments to a lender at a specified monthly date, including principal and interest components. The EMI amount is calculated using a formula considering the loan amount, interest rate, and loan tenure. Therefore, borrowers must choose the right EMI amount based on their financial situation to ensure it is affordable and within their budget.

 

Frequently asked questions

1. What happens if the borrower fails to pay the Real Estate EMI for three consecutive months?

Ans. If the borrower does not pay the Real Estate EMI for three consecutive months, the lender charges interest based on the terms fixed during loan sanction.

2. What are two methods to calculate EMI, and which is better?

Ans. There are two methods to calculate EMI: the flat-rate method and the reducing-balance method. Borrowers favour the reducing-balance approach, resulting in lower interest payments overall and allowing borrowers to budget their finances effectively.

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