What is home loan amortisation and how does it work?

In summary

Home loan amortisation shows how each equated monthly instalment (EMI) repays part of the principal and interest. Under a standard reducing-balance loan, interest is calculated on the outstanding principal, so its share of the EMI generally decreases as the loan is repaid.

• Each EMI contains a principal component and an interest component.
• Early EMIs usually contain more interest because the outstanding balance is higher.
• At 7.50% p.a., a Rs. 50 lakh home loan over 20 years has an EMI of approximately Rs. 40,280.
• The first EMI includes Rs. 31,250 in interest and approximately Rs. 9,030 towards principal.
• An amortisation schedule shows each payment, its components and the remaining loan balance.
• Part-prepayment can change the repayment schedule by reducing the outstanding principal.

Reviewing the schedule helps you compare tenure, interest costs and repayment options. You can use the Bajaj Finance home loan EMI calculator to estimate your EMI and view the repayment breakdown.

Home loan amortisation is the gradual repayment of borrowed principal and interest through instalments over a specified tenure.

In a standard amortising home loan, each EMI contributes towards both components.

The interest is calculated on the outstanding balance, while the principal component reduces the amount owed.

Consider Aditi, a 32-year-old salaried professional in Pune who borrows Rs. 50 lakh to purchase her first home.

She chooses a 20-year tenure at an illustrative interest rate of 7.50% p.a. Her EMI is approximately Rs. 40,280.

However, the entire Rs. 40,280 does not reduce her loan balance.

In the first month, Rs. 31,250 represents interest. Only approximately Rs. 9,030 reduces the principal.

This distinction explains why a home loan balance falls relatively slowly during the initial repayment years.

Home loan amortisation works by calculating interest on the outstanding principal and allocating the remaining EMI towards principal repayment.

For a standard monthly reducing-balance illustration:

Monthly interest = Outstanding principal × Annual interest rate ÷ 12 ÷ 100

Principal repaid = EMI − Monthly interest

New outstanding balance = Previous outstanding balance − Principal repaid

Consider Aditi's Rs. 50 lakh loan at 7.50% p.a.

Her monthly interest rate is 0.625%.

In the first month:

Monthly interest = Rs. 50,00,000 × 0.625% = Rs. 31,250

Principal repaid = Rs. 40,280 − Rs. 31,250 = approximately Rs. 9,030

The new outstanding principal is approximately Rs. 49.91 lakh.

The following month's interest is calculated on this lower balance.

Over time, the interest component generally declines and more of each EMI reduces principal.

Actual lender calculations can depend on the applicable interest-accrual method, repayment date and rate resets.

An amortisation schedule shows how the principal and interest components change across the repayment period.

It helps borrowers understand whether their repayments are reducing the outstanding loan as expected.

The following schedule uses Aditi's Rs. 50 lakh loan at a constant 7.50% p.a. over 240 months.

Figures are illustrative and rounded. Calculations use the unrounded EMI and monthly reducing-balance method.

After five years, Aditi has made 60 EMIs, but approximately Rs. 43.45 lakh remains outstanding.

By the 180th instalment, the principal component is much higher than in the first month.

The schedule therefore reveals how repayment progresses, not just the monthly amount payable.

Start by calculating the EMI from the principal, monthly interest rate and repayment tenure.

The standard EMI formula is:

EMI = [P × R × (1 + R)^N] ÷ [(1 + R)^N − 1]

Where:

• P = Original loan principal.
• R = Monthly interest rate, calculated as annual rate ÷ 12 ÷ 100.
• N = Total number of monthly instalments.

For Aditi's loan:

P = Rs. 50,00,000

R = 7.50 ÷ 12 ÷ 100 = 0.00625

N = 20 × 12 = 240

Estimated EMI = Rs. 40,280

Once the EMI is known, calculate the interest and principal components for each month using the outstanding balance.

Repeat the process until the loan is fully repaid.

A calculator makes this process easier because the principal changes after every instalment.

Use the Bajaj Finance home loan EMI calculator to review the estimated repayment schedule.

A longer tenure lowers the EMI at the same principal and rate, but it increases total interest.

Consider two options for Aditi's Rs. 50 lakh loan at 7.50% p.a.

Figures are illustrative and rounded.

The 20-year option reduces her EMI by approximately Rs. 6,071.

However, it increases the total interest expense by approximately Rs. 13.24 lakh.

If Aditi's monthly budget is limited, the longer tenure can improve affordability.

If she can comfortably pay the higher EMI, the shorter tenure may reduce her overall borrowing cost.

The suitable option depends on income, existing financial commitments and emergency savings.

Part-prepayment reduces the outstanding principal, which can lower future interest.

The lender may then revise the EMI, remaining tenure or both under the applicable terms.

Consider Aditi after five years of repayment.

Her outstanding principal is approximately Rs. 43.45 lakh.

She receives a bonus and decides to make a Rs. 5 lakh part-prepayment.

The outstanding principal reduces to approximately Rs. 38.45 lakh.

If she keeps the EMI unchanged, the lower balance can be repaid in fewer instalments.

If she keeps the existing remaining tenure, the lender may recalculate a lower EMI.

Aditi should ask for a revised amortisation schedule before deciding.

She should also confirm that the additional payment is applied towards principal rather than treated as an advance EMI.

Bajaj Finance lists nil part-prepayment charges for eligible individual floating-rate home loans. Other loan categories may have different terms.

A floating-rate home loan's repayment schedule can change when the applicable interest rate is reset.

An increase in rates raises the interest charged on the outstanding principal.

Depending on the lender's process and the borrower's selection, the EMI, remaining tenure or both can change.

For example, suppose Aditi's rate increases while she still has a substantial balance outstanding.

If her EMI remains unchanged, a larger share may go towards interest, slowing principal repayment.

Her remaining tenure could therefore increase.

Under the Reserve Bank of India's (RBI) framework for EMI-based floating-rate personal loans, borrowers must receive relevant repayment options when interest rates reset.

These include changes to EMI, tenure or both, along with applicable prepayment and rate-switching choices.

The lender must also communicate the effect of a reset on the repayment arrangement.

Aditi should review the updated amortisation schedule after each applicable rate change.

Source: RBI – Floating-rate EMI resets.

A standard amortising EMI covers principal and interest. An interest-only payment generally does not reduce principal during the interest-only period.

This distinction matters for under-construction properties and loan arrangements involving partial disbursement.

For example, a borrower may initially receive only part of a sanctioned home loan while construction progresses.

The lender may require pre-EMI interest on the disbursed amount before full EMI repayment begins.

During such an interest-only period, the principal is not reduced through regular principal instalments.

Once the agreed amortising repayment begins, the EMI includes both principal and interest.

Borrowers should check the disbursement schedule, pre-EMI terms and full repayment commencement date before choosing an under-construction property.

An amortisation schedule helps you understand the long-term impact of the loan amount, rate and tenure before applying.

Consider Rahul, a 35-year-old salaried professional in Hyderabad earning Rs. 1.20 lakh monthly.

He wants to purchase a flat priced at Rs. 60 lakh and plans a Rs. 15 lakh down payment.

His proposed home loan requirement is Rs. 45 lakh.

At 7.50% p.a. over 20 years, the illustrative EMI is approximately Rs. 36,252.

That is around 30.2% of Rahul's stated monthly income before existing EMIs and household expenses.

He should examine the amortisation schedule to understand how much principal remains after five or ten years.

This helps if he expects to sell the property, refinance or make part-prepayments later.

Bajaj Finance offers home loans from Rs. 1 lakh to Rs. 15 crore*, with eligible repayment tenures up to 32 years.

After estimating the EMI and reviewing his available contribution, Rahul can check his Bajaj Finance Home Loan eligibility to assess his borrowing options.

Review the amortisation schedule when taking a home loan, after a rate reset and following any part-prepayment.

Check that the following details match the applicable loan terms:

1. Outstanding principal before the next instalment.
2. Applicable interest rate and calculation method.
3. Monthly EMI and repayment date.
4. Principal and interest components.
5. Remaining number of instalments.
6. Effect of additional payments.
7. Revised maturity date after any changes.

For example, Aditi should compare the lender's updated schedule with her repayment statement after making a part-prepayment.

If the account balance or remaining tenure differs from the expected position, she should request clarification.

An amortisation schedule is most useful when it reflects the actual loan balance and current rate rather than only the original sanction assumptions.