<\/span><\/h2>\nThe interest on a housing loan is calculated using a method called the reducing balance method.<\/b> Under this method, interest is charged only on the outstanding loan balance after deducting the principal repayment made. The calculation is done monthly, with the interest component reducing gradually over the loan tenure as the outstanding amount decreases.<\/p>\n
Let’s understand the process of calculating housing loan interest with an example:<\/p>\n
Assume you have taken a housing loan of $200,000 at an annual interest rate of 5% for a tenure of 20 years. Using the reducing balance method:<\/p>\n
Step 1: Convert the annual interest rate to a monthly rate. In this case, it would be 5%\/12 = 0.4167% per month.<\/p>\n
Step 2: Calculate the monthly EMI (Equated Monthly Installment) using a loan calculator. Let’s assume it to be $1,337. Consequently, the principal part of your first EMI payment would be $1,085.38, and the interest component would be $251.29.<\/p>\n
Step 3: Deduct the principal part paid ($1,085.38) from the outstanding loan balance ($200,000), leaving you with an outstanding balance of $198,914.62.<\/p>\n
Step 4: Calculate the interest for the next month using the reduced outstanding balance. In this case, it would be $198,914.62 * 0.4167% = $828.80.<\/p>\n
Step 5: Repeat these steps every month until the loan is fully repaid.<\/p>\n
By following this reducing balance method, the interest payable decreases over time as you continue paying off the principal amount, thus resulting in a significant saving on the overall interest paid.<\/p>\n