What is Home Loan Amortisation Schedule & How It works

Buying a home is a significant financial milestone for individuals and families in India. Most people rely on Home Loans to fulfil this dream. However, taking a Home Loan involves repaying both the principal amount borrowed and the interest charged by the lender. To make this process transparent and structured, lenders provide borrowers with a document known as the ‘Home Loan Amortisation Schedule.’ Let’s explore what a Home Loan Amortisation Schedule is, how it works and why it is crucial for borrowers.

What is a Home Loan Amortisation Schedule?

A Home Loan Amortisation Schedule is a detailed table that outlines the periodic payments a borrower must carry out, to repay their Home Loan over its tenure. It includes a breakdown of each instalment's components, such as the principal amount and the interest portion. This schedule helps borrowers understand how their monthly payments contribute to reducing the loan balance and how much they pay in interest over time.

How does a Home Loan Amortisation Schedule work?

The Home Loan Amortisation Schedule operates on the principle of reducing the outstanding loan balance over time. Here's how it works:

Initial stage: Higher Interest payments

In the initial years of your Home Loan, a significant portion of your Equated Monthly Instalment (EMI) goes towards paying the interest. This is because your EMI is calculated, based on the outstanding loan balance and during the early years, the principal amount is relatively high.

Gradual reduction of Principal

As you continue with your regular EMI payments, the outstanding principal balance gradually decreases. Consequently, the interest component of your EMI also decreases. This shift occurs because the interest is charged on the remaining outstanding balance.

Final stage: Higher Principal payments

During the later stages of your Home Loan tenure, a more substantial portion of your EMI is allocated towards repaying the principal amount. This stage is marked by accelerated reductions in the outstanding balance. You'll notice that your loan gets paid off quicker, during this phase.

Components of a Home Loan Amortisation Schedule

To understand your Home Loan Amortisation Schedule fully, let's look at its key components:

EMI amount

Each row of the schedule displays the EMI amount you must pay for that specific month. The EMI includes both the principal and interest components.

Principal repayment

This section shows how much of your EMI goes towards repaying the principal amount. Over time, this portion increases, contributing to the reduction of the outstanding balance.

Interest payment

Here, you'll find the interest component of your EMI for each month. It's highest during the early stages of your loan and gradually decreases as you progress paying off the loan.

Outstanding loan balance

The schedule provides the remaining outstanding balance after each EMI payment. This figure decreases month by month as you continue to repay your loan.

Must Read: How to Reduce Home Loan EMI

Benefits of understanding your Home Loan Amortisation Schedule

Now that we've delved into what a Home Loan Amortisation Schedule is and how it works, let's explore the numerous benefits of understanding and regularly reviewing this document:

Financial planning and budgeting

A well-structured financial plan is essential for managing your monthly expenses and achieving your long-term financial goals. Your Home Loan Amortisation Schedule plays a primary role in this process. It provides a clear picture of your monthly EMI commitments, helping you budget more effectively. Knowing exactly how much you need to allocate towards your Home Loan repayment enables you to plan other financial aspects of your life, such as investments, savings and discretionary spending.

Interest cost awareness

One of the most eye-opening aspects of an amortisation schedule is the significant interest payments made in the initial years of your home loan. As mentioned earlier, during this phase, a substantial portion of your EMI goes towards paying off the interest. This realisation can be a motivator for borrowers to consider making prepayments. By reducing the outstanding principal balance early in the loan tenure, borrowers can reduce the total interest paid over the life of the loan.

Loan progress tracking

Another vital function of the Amortisation Schedule is tracking the outstanding loan balance. Every month, as you pay your EMI, this balance decreases. Monitoring this reduction helps you visualise your progress towards becoming debt-free.

Prepayment planning

Armed with the knowledge provided by the Amortisation Schedule, borrowers can strategically plan prepayments. If you receive surplus funds through bonuses or investments, you can use the schedule to determine the best time for prepayments and the amount required to meet your financial goals. Reducing the outstanding principal through prepayments can significantly shorten the loan tenure, leading to substantial interest savings.

How to access your Home Loan Amortisation Schedule

Many Lenders typically provide borrowers with their home loan amortisation schedules along with the loan agreement. However, borrowers can also generate these schedules themselves using Home Loan EMI Calculators available on lender websites or financial planning apps. To create your amortisation schedule, you'll need the following information:

• Loan amount

• Interest rate

• Loan tenure

Once you enter these details, the calculator will generate a detailed schedule, allowing you to view your EMI breakdown and track your loan's progress.

A Home Loan Amortisation Schedule is an invaluable tool for borrowers. It makes the loan repayment process transparent, allowing borrowers to plan their finances better, understand their interest obligations and track their progress towards becoming debt-free. By regularly reviewing their Amortisation Schedules, borrowers can make informed decisions about prepayments and potentially shorten the loan tenure, saving on interest costs. Therefore, every Home Loan borrower in India should take into account their loan's Amortisation Schedule to make the most of their homeownership journey.