Why is the Interest Component Higher in the Initial EMIs of a Home Loan

When repaying a Home Loan, you may have noticed that, at the beginning, a significant portion of your Equated Monthly Instalment or EMI goes towards paying off the interest component rather than the principal. This article explores how a Home Loan is structured and why the interest component is higher in the initial phase of your loan.  

How is EMI Calculated?

An EMI is a specific amount of money paid to a lender to repay a loan. It has two components: 

• Principal: This is the amount that you originally borrowed. 
• Interest: This is the percentage charged by the lender on the principal.  

The formula to calculate EMIs manually is: 

EMI = P × r × (1 + r)ⁿ / ((1 + r)ⁿ - 1) 

Here, 

• P represents the principal amount 
• r is the rate of interest 
• n denotes the loan tenor 

Calculating EMIs manually may lead to errors. To ensure accurate calculations and simplify the process, you can use our Home Loan EMI Calculator. 

Why is the Interest Higher Initially? 

At the onset of your loan, the principal amount is at its maximum. Since the interest is calculated on this remaining principal, the interest portion of your EMI is substantial during the initial period. As you continue to make payments, the principal gradually reduces, leading to a decrease in the interest component and an increase in the principal portion of your EMI. 

Importance of an Amortisation Schedule

An amortisation schedule is a detailed table that outlines the repayment structure of a loan over its tenor. It shows the EMI-wise breakdown of two components – principal and interest. This way, you get an insight into how your EMI amount contributes towards principal repayment and interest payments.  

With a repayment schedule, you can understand how the interest component is higher initially and optimise your finances accordingly.