What Is Home Loan Amortisation Schedule And How It Works

One of the most important financial commitments an individual makes is taking on a home loan. Therefore, understanding everything about it, especially the repayment of the loan becomes important. One such concept that is related to repayment is the home loan amortisation schedule. Understanding the importance and benefits of this schedule can help individuals plan their repayments. This article explores what is home loan amortisation schedule, its working, and its importance. Furthermore, it also explains the factors affecting home loan amortisation.

Understanding Home Loan Amortisation Schedule

A home loan amortisation schedule is a table that helps borrowers understand the repayment schedule. It assists individuals in understanding the breakdown of each EMI. Every EMI has two parts:

• The Principal Component: The component that reduces the actual loan amount.
• The Interest Component: The component that reduces the cost of the loan.

The home loan amortisation schedule specifies the amount that would be allocated towards the principal and the interest payment and highlights the outstanding loan amount. Initially, the interest component is higher than the principal component. Over time, the interest payment reduces and the principal payment increases.

How Does Home Loan Amortisation Work?

The home loan amortisation schedule follows a mathematical formula to provide the breakdown of each EMI payment. The process works as follows:

• First Few Years: In the earlier years, a significant portion of the EMI is allocated to interest payment along with a small portion being directed towards principal payment.
• Mid to Late Tenure: As loan repayment continues, the interest portion decreases and a larger portion is allocated to a principal payment.
• End of the Loan Tenure: In the final years, most of the EMI payment goes towards paying off the principal amount and reducing the outstanding balance.

Factors That Affect Home Loan Amortisation

Now that we have understood how amortisation works for home loans, let us look into the various factors that affect home loan amortisation:

• Total Loan Amount and Tenure: If the loan amount is high, the EMI might be higher. On the other hand, if the tenure of the loan is long, it may result in smaller EMIs. However, it will increase the total cost of the loan.
• Applicable Interest Rate: If the interest rate of the loan is higher, it may result in a higher amount of the interest component in each EMI. It will also increase the total cost of the loan.
• Type of the Loan and Prepayments: The EMI for fixed interest rates are consistent, whereas, the EMIs for floating interest rates can fluctuate depending upon the market interest rates. Additionally, if the individual makes additional payments, it can reduce the loan amount.

Why is a Home Loan Amortisation Schedule Important?

A home loan amortisation schedule can be helpful in several ways.

• Provides Transparency in Repayment: Tracking the distribution of EMI and understanding how much amount is repaid becomes easier with a loan amortisation schedule.
• Assist in Financial and Prepayment Planning: Knowing the balance amount helps individuals plan their financials and include possible prepayments to drastically reduce the loan amount.
• Helps in Planning Taxes: Borrowers can claim tax benefits on the principal payment under Section 80(C) and on the interest payment under Section 24(b).

Conclusion

A home loan amortisation schedule is a structured schedule that helps borrowers understand loan repayments in detail. It shows how each EMI will be used to pay off the interest and the principal component of a loan. The schedule shows how the interest payment would be larger in the initial years while the principal payment would be larger in the final years of the repayment.

Understanding how each EMI affects the total loan amount, individuals can plan their financials and prepayments to reduce the loan and the total cost of the loan. Furthermore, it also helps in tax planning. Various factors that affect home loan amortisation are the total loan amount, tenure, interest rate, loan type and frequency and amount of prepayments.

FAQs on Home Loan Amortisation Schedule

Does prepayment affect the home loan amortisation schedule?

Yes. Prepayment can affect the home loan amortisation schedule since prepayment reduces the principal amount, resulting in lower interest rates and a shorter loan tenure.

Do floating interest rates affect the home loan amortisation schedule?

Yes. Floating interest rates do affect the home loan amortisation schedule. The EMI structure and the tenure of the loan may be recalculated as the interest rates change.

Can I calculate the home loan amortisation schedule online?

Yes. Various banks and financial institutes provide online calculators that can help you calculate your home loan amortisation schedule.

What is the main benefit of a home loan amortisation schedule?

The main benefit of a home loan amortisation schedule is that it provides a clear breakdown of how an individual can repay the entire loan amount, including interest payments.

Can I customise my home loan amortisation schedule?

Unless you are considering prepayment of the loan amount, you cannot customise the home loan amortisation schedule. This is because the schedule is based on the total loan amount, tenure and interest rate.