Homebuying and financing the purchase are some of the most important financial decisions you will make. Therefore, understanding the nuances and terms of the loan before you sign up is important. One of the decisions you will be required to make in applying for a home loan is deciding if you want to sign up for a pre-EMI or a full-EMI. It is a good idea to understand both options and pick the one that suits your financial goals.
Most homebuyers who opt for a property that is in its construction phase prefer the pre-EMI repayment system. In this, the bank or NBFC that offers housing finance will disburse the loan amount partially. Typically, property developers collect payment for an under-development property in stages (as the construction progresses). The lender expends the loan amount to sync with this staggered payment process.
By opting for pre-EMI, the homebuyer need not start repaying the principal amount immediately. For the pre-EMI phase, the borrower only needs to pay interest on the amount disbursed. This makes for much smaller monthly payments to the lender. Once the construction is completed or the full loan is disbursed (whichever is earlier), pre-EMI gets converted to full EMI. Now the monthly payments to the bank will include repayment of the interest and the principal. Pre-EMI can only be availed if you choose to buy an apartment that is in the pre-launch or under-construction phase. The maximum duration for pre-EMI is three years.
An example can help clarify how pre-EMI works. After funding the downpayment with his savings, Mr X has decided to buy an under-construction property and requires a loan of INR 50 lakhs. The bank agrees to lend him this amount for a tenure of 15 years at an interest rate of 10%. The initial disbursement from the bank is INR 10 lakhs. Now the monthly EMI that Mr X is required to pay is interest on INR 10 lakhs only. The next disbursement amount of INR 25 lakhs comes the following year, and now Mr X has to pay interest on 35 lakhs. Only when the total 50 lakh loan amount is completely disbursed (usually at the completion of construction) will Mr X be required to pay interest + principal repayment in the form of full EMI. The loan tenure of 15 years starts at this point.
The Full-EMI option requires the homeowner to start making monthly payments to the bank or lender immediately after the principal amount is disbursed. So if your loan is sanctioned and disbursed (partly or wholly) in the month of May, your EMI schedule will start from the month of June. This EMI will also include repayment of the principal part and the interest. It is important to remember the fact that the bank may disburse the principal in stages, but regardless of this, you opt to repay the entire EMI.
Let us take an example to understand this. Ms Y takes a home loan from a bank for INR 50 lakhs with a tenure of 15 years at a 10% interest rate. Now she has opted for a staggered disbursement, and the bank’s initial disbursement amount is INR 10 lakh. Since Ms Y has opted for a full-EMI repayment system, she must repay interest + principal (50 lakhs) in monthly instalments from the first month. So, her loan tenure starts immediately.
Choosing Pre-EMI or Full-EMI requires a study of your financial situation and expected income. Let us take a look at the conditions to formulate your EMI strategy.
Full-EMI is a good option for you when you buy your real estate asset or apartment as a long-term asset and do not plan to sell it off till the loan is repaid.
Full-EMI is good for those who wish for the loan tenure to start immediately. This brings benefits such as early repayment of the loan and immediate tax benefits. In Pre-EMI, you can avail of tax benefits only when the full-EMI term starts.
The Pre-EMI term is not considered to be part of the loan tenure. So, the difference in the interest between the two options is an additional financial burden.
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