Back of the envelope home loan calculations

In this post I am going to write about how to do simple back-of-the-envelope home loan calculations. It is much easier than remembering complex financial formulas and then working them out in excel.

Lets say, you want to figure out how much amount you will end up paying before you close the loan and what tenure should you opt for? To make things simpler, lets assume that the rate of interest will remain constant throughout the tenure.

Now let's throw in some numbers and begin calculations. Lets say, you want to opt for a loan of 30 Lakh INR ( 3 million INR) and your bank is offering you a rate of interest of 10% for a period of 20 years. All you now need to do is look up the multiplication ratio in the table given below to figure out the amount repaid, to close the loan.

Table 1:- Amount to Principal Ratio

Looking up, we find that the value is 2.32. This means you will end up repaying 2.32 x 30 Lakhs = 69.6 Lakh over a period of 20 years to close the loan. Similarly if your loan principal is 50 Lakh INR you will end up paying 1.16 Cr over 20 years. Find a pictorial version of the same table below.

Fig 1:- Amount to Principal Ratio v/s Interest Rates

Lets take a third example to help understand how to interpret the graph. Lets say, your interest rate is 14% and your tenure is 20 years, then following the blue line shows that the ratio is ~3. This means you will end up paying approximately 3x your loan amount if the rate of interest is 14% and tenure is 20 years.

Now, isn't that simple? In fact you don't even need a pencil or an envelope to do that kind of calculation.

The simplicity comes at a small cost. The actual amount you end up paying will deviate from the calculated value by less than 0.2%. This value is negligible enough to be overlooked.

Hope this makes your calculations easy and fun and good luck with buying your Dream House !!!