Q. What are the basis of interest rates calculation for Home Loans?
The calculation of interest rates on home loan is on Monthly Reduction or Yearly Reduction balance. In Monthly Reduction Balance, the principle on which one pays interest keep on reducing every month as one pays the EMI. Whereas in Yearly Reduction Balance, the principle gets reduced by the end of the year; therefore borrower continue to pay the interest on a certain part of the principle which he has paid back to the bank, which means the EMI for the Monthly Reduction system is less effective than the Yearly Reduction system of calculating the interest.