How to Calculate Home Loan Interest

Understanding how to calculate home loan interest is crucial for making informed financial decisions when purchasing a property. Whether you're planning to take a home loan from SBI, HDFC, ICICI, or any other bank, knowing how interest is calculated helps you plan your finances better and potentially save thousands of rupees over the loan tenure.

Understanding Home Loan Interest Calculation

Home loan interest is calculated using the reducing balance method, where interest is charged only on the outstanding principal amount. This means that as you pay down your loan, the interest component decreases while the principal component increases. The monthly payment remains constant, but the proportion of interest and principal changes over time.

The standard formula for calculating monthly home loan payments is: M = P × [r(1+r)^n] / [(1+r)^n - 1], where M is the monthly payment, P is the principal loan amount, r is the monthly interest rate (annual rate divided by 12), and n is the total number of payments (loan term in years multiplied by 12).

How to Calculate Home Loan Interest Per Month

To calculate home loan interest per month, you need to multiply the outstanding principal balance by the monthly interest rate. For example, if you have a loan of ₹50 lakhs at an annual interest rate of 8.5%, the monthly interest rate would be 8.5% ÷ 12 = 0.7083%. The first month's interest would be ₹50,00,000 × 0.7083% = ₹35,417.

As you make monthly payments, the principal reduces, and consequently, the interest amount decreases. This is why the interest component is highest in the initial years and gradually reduces over time. Understanding this pattern helps you plan prepayments strategically to maximize interest savings.

How to Calculate Home Loan Interest Rate Per Month

The monthly interest rate is simply the annual interest rate divided by 12. For instance, if your annual interest rate is 8.75% (common for SBI home loans), the monthly rate would be 8.75% ÷ 12 = 0.7292%. This monthly rate is then used to calculate the interest payment for each month based on the outstanding balance.

It's important to note that some banks may use daily reducing balance method, where interest is calculated daily and then summed up for the month. However, the monthly reducing balance method is more common and easier to understand for most borrowers.

How to Calculate Home Loan Interest in Excel

Excel provides powerful functions to calculate home loan interest. The PMT function calculates the monthly payment: =PMT(rate/12, nper*12, -pv), where rate is the annual interest rate, nper is the loan term in years, and pv is the loan amount. The negative sign before pv indicates that it's a payment (outflow).

To calculate monthly interest in Excel, you can use the IPMT function: =IPMT(rate/12, period, nper*12, -pv), which gives you the interest portion of a specific payment. The PPMT function calculates the principal portion: =PPMT(rate/12, period, nper*12, -pv). These functions make it easy to create a complete amortization schedule in Excel.

How to Calculate Home Loan Interest in SBI

SBI (State Bank of India) calculates home loan interest using the reducing balance method. As of 2025, SBI home loan interest rates typically range from 8.75% to 9.65% per annum, depending on factors like loan amount, credit score, and property type. The interest rate may vary for salaried individuals, self-employed professionals, and NRIs.

SBI offers various home loan products with different interest rate structures. The calculation method remains the same - monthly reducing balance - but the applicable rate depends on your eligibility and the loan product you choose. You can use SBI's online home loan calculator or our calculator above to get accurate estimates based on current SBI rates.

How to Calculate Home Loan Interest for Income Tax Benefit

Under Section 24(b) of the Income Tax Act, you can claim deduction on home loan interest up to ₹2 lakhs per financial year. This tax benefit significantly reduces your effective interest cost. To calculate the tax benefit, multiply your annual interest payment (capped at ₹2 lakhs) by your income tax slab rate.

For example, if you're in the 30% tax slab and pay ₹3 lakhs in interest during a year, you can claim deduction on ₹2 lakhs (the maximum limit), resulting in a tax saving of ₹2,00,000 × 30% = ₹60,000. This effectively reduces your interest cost from ₹3 lakhs to ₹2.4 lakhs (₹3 lakhs - ₹60,000 tax benefit).

The tax benefit is available for both self-occupied and let-out properties, though the limits may differ. For self-occupied properties, the deduction is capped at ₹2 lakhs, while for let-out properties, there's no upper limit, but the property income is taxable.

Home Loan Interest Formula Explained

The home loan interest formula involves calculating the monthly payment first, then determining how much of each payment goes toward interest versus principal. The interest portion is calculated as: Interest = Outstanding Principal × Monthly Interest Rate. The principal portion is: Principal = Monthly Payment - Interest.

Over the loan tenure, you'll notice that the interest component decreases while the principal component increases. This is because as you pay down the principal, the outstanding balance reduces, leading to lower interest charges. By the end of the loan term, most of your payment goes toward principal repayment.

Tips for Reducing Home Loan Interest

Making prepayments is one of the most effective ways to reduce home loan interest. Even small prepayments can significantly reduce your total interest burden and shorten the loan tenure. Consider making prepayments whenever you have surplus funds, such as annual bonuses or tax refunds.

Another strategy is to opt for a shorter loan tenure if your EMI capacity allows. While this increases your monthly payment, it dramatically reduces the total interest paid. You can also consider switching to a lower interest rate through balance transfer if another bank offers better rates.

Understanding how to calculate home loan interest empowers you to make better financial decisions. Use our calculator above to experiment with different scenarios, including prepayments and tax benefits, to find the optimal strategy for your situation. Whether you're calculating interest for SBI loans, planning tax benefits, or creating Excel spreadsheets, this comprehensive guide and calculator provide all the tools you need.