How is the interest rate calculated?

The interest on home loans is usually calculated either on monthly reducing or yearly reducing balance. In some cases, daily reducing method is also adopted.

Annual reducing: In this system, the principal, for which you pay interest, reduces at the end of the year. Thus, you continue to pay interest on a certain portion of the principal that you have actually paid back to the lender. This means that the EMI for the monthly reducing system is effectively less than the annual reducing system.

Monthly reducing: In this system, the principal, for which you pay interest, reduces every month as you pay your EMI.

Daily Reducing: In this system, the principal, for which you pay interest, reduces from the day you pay your EMI. EMI in the daily reducing system is less than the monthly reducing system