Understanding EMIs and Pre – EMIs

Most buyers finance their new home through a home loan as it is the most affordable way of purchasing a property. A home loan repayment plan can be structured in many different ways. Finding a lender with a minimal interest rate is of utmost significance.

There are two vital options that one needs to understand also – choosing wisely between pre-EMIs and EMIs. These are ways of repaying the loan amount to help you manage your funds better while your dream home is being constructed. However, each of them can affect your repayment capacity differently. Let’s understand what both these options entail and which is more beneficial under what circumstance.

What is EMI?

Equated Monthly Instalments (EMIs) are the regular home loan repayment paid by you every month for a selected period of time. This includes both the interest and principal. In case you have taken the Pre-EMI option, the full-fledged EMI payment starts when the property is completed.

What is Pre-EMI?

Pre-EMIs are the monthly payments that a home buyer decides to make on the home loan’s interest component. This option is given when the property is under construction and is offered by the developer under Construction Linked Plan. It is essentially the reduced payment you make as it does not include the loan’s principal component. It is not taken to be a part of the home loan tenure but is designed to reduce the payment burden when the asset is under development.

Difference between Pre-EMI and EMI

• Loan disbursal – If you go in for a full EMI, you can ask for complete disbursal of the loan amount, while in the case of Pre EMI, the loan amount is given partially. However, the interest is always calculated on the actual loan amount disbursed.
• Loan repayment – The installment amount paid in the start is much lower in the case of Pre EMIs, while in the case of full EMI, it is a much more considerable amount.

When is EMI ideal?

• If you are buying the property for long term investment.
• In case you want to repay the debt on the property as soon as possible and reduce the long-term obligation of a home loan. It will save on the extra interest costs on the home loan.
• If you want to reap tax benefits as soon as the repayment tenure beings.
• If you see a delay in the construction period of the project because the pre-EMI continues to be paid until the project is complete. This means that you will end up paying a more considerable interest amount on the home loan.
• If you do not have any other investments to make.

When is Pre-EMI ideal?

• The pre-EMI option is ideal for homebuyers who are waiting for a change in income band or cannot afford to pay the entire EMI at present.
• The borrower wants to have a reserve fund to meet emergency situations.
• If the borrower wants to invest the difference between Pre-EMI and EMI further to get higher returns.
• If the borrower is staying in a rented apartment and has a high amount to pay as rent.

Tax Benefits

Both options enjoy the same tax benefits since tax deduction is not applicable when the property is under construction. Only once the borrower gets the possession certificate, the amount of interest paid in both options is aggregated and considered for a tax deduction in five equal instalments.

EMIs and pre-EMIs are financial decisions that you, as a buyer, need to take, keeping in mind the existing market conditions, your income and expenditure, and the resale value of the project. Now with absolute clarity on pre-EMI and EMI, you can make an informed decision on how to repay the home loan when you buy your new home. Remember, invest smart and repay smarter!