What is Pre EMI Vs. Full EMI in Home Loan: Which is better?

I am sure you already know what the Full EMI of home loan means. But what is Pre-EMI of Home Loans in India (2021)?

The Pre-EMI option is available in case one is buying an under-construction property, where disbursement of home loan is done in parts linked to every stage of construction. So what happens is that when one opts for the pre-EMI option, the borrower only needs to pay monthly interest on the disbursed loan amount only. And this interest is called the pre-EMI (equated monthly installment) interest. The Pre-EMI is paid from the date of each disbursement up to the date of commencement of the regular full EMI. As the disbursed amount increases, it also keeps increasing the pre-EMI interest payable as the principal drawn till then increases too.

Full EMI Vs. Pre-EMI

Let’s take a small example to understand the difference between Pre-EMI and Full EMI of the home loan.

Suppose you take a home loan for an under-construction property of Rs 50 lakh for a 20-year tenure at an interest rate of 8%.

If you take the full EMI route, i.e. you begin paying the full EMI from the start, then you need to pay Rs 41,822 per month as EMI. Do note that you can opt for Full EMI even for the home loans on under-construction properties. In full EMI, you are paying the loan EMI as per the sanctioned loan amount and not the actual disbursed amount. Full EMI includes principal repayment as well as interest payment.

But if you take the pre-EMI option, then the pre-EMI you will pay will depend on the amount of loan amount disbursed till now. That is, you only pay the interest on the actual disbursed amount. There is no principal repayment here.

So suppose Rs 10 lakh disbursement happens every 6 months. So the pre-EMI will be as follows:

  • First disbursal of Rs 10 lakh. Pre-EMI is Rs 6667 per month
  • Second disbursal of Rs 10 lakh after 6 months. Total disbursal till now Rs 20 lakh. Pre-EMI is Rs 13,333 per month.
  • Third disbursal of Rs 10 lakh after 12 months. Total disbursal till now Rs 30 lakh. Pre-EMI is Rs 20,000 per month.
  • Fourth disbursal of Rs 10 lakh after 18 months. Total disbursal till now Rs 40 lakh. Pre-EMI is Rs 26,667 per month.
  • Fifth & final disbursal of Rs 10 lakh after 24 months. Total disbursal till now Rs 50 lakh. Now full EMI will be applicable, i.e. Rs 41,882 per month.

So the full EMI starts only after the final disbursal.

In the 24 months (time between the first disbursal and the last one) while you were paying the pre-EMI, you will have paid a total interest of Rs 4 lakh (Rs 6667 x 6 + Rs 13,333 x 6 + Rs 20,000 x 6 + Rs 26,667 x 6).

Mind you that in the case of the Pre-EMI option, the loan principal outstanding at the end of 24 months still remains Rs 50 lakh as till then, no principal repayment has been made.

If you compare this with the Full EMI, your home loan outstanding at the end of 24 months will only be Rs 45-46 lakh. So eventually in the case of pre-EMI, you end up paying a lot of additional interest.

As we can see, the borrower pays an additional Rs 4 lakh through these 24 months in case of the Pre-EMIs whereas if the borrower opts for regular Full EMIs from the start itself, he pays Rs 10 lakh over these 24 months. But what’s worth noting here is that this Rs 10 lakh is part of the regular loan repayment and included in the 20-year tenure, whereas in the case of Pre-EMI the Rs 4 lakh paid is not a part of the regular loan repayment, and the 20-year tenure starts after this payment.

Also, note that this Pre-EMI duration is not included in the original tenure of the sanctioned loan. The Pre-EMI period is over and above the actual tenure of the home loan. So if you were confused about the impact of pre-EMI on loan tenure, then understand that there is no impact on loan tenure because tenure is only counted from the date of complete disbursal of loan and not when pre-EMI is started. So if you pay pre-EMI for 2 years before the Full-EMI begins, then your total loan time will be 20+2 years.

That was an example of a Pre-EMI calculation.

Note – The regular Home Loan EMI Calculator will tell you that regular full EMI includes both components of the principal amount and the interest on the full sanctioned loan amount. But if you check the Pre EMI Calculator, you will find out that it only includes the simple interest (and not principal) on the loan amount disbursed (and not the sanctioned limit/amount).

But there are some risks with Pre-EMI schemes of home loan repayment. In case of any construction delays (or stalled projects), even by just a few months, the borrower will have to continue paying the extra interest as the pre-EMI.

Now we look at the benefits of pre-EMI Vs full EMI.

Benefits of Pre-EMI

  • Since the borrower is paying only the interest on the disbursed amount alone (and there is no principal repayment), it is lighted on the pocket of the borrower. Given that during the construction phase, the borrower might also be staying on rent, this reduces the overall burden of pre-EMI + rent on him till the time construction is complete when compared to full-EMI + rent in case of full EMI approach. If affording house rent and Full EMI is tough on your finances, then taking the pre-EMI is a good option. Of course, the problem with availing of the pre-EMI interest is that you will incur a higher interest cost than the regular full EMI option.
  • This one is for more adventurous ones. If you can somehow invest the difference amount between the full-EMI and Pre-EMI to generate returns higher than the loan interest rate, then that can be a profitable option. But for most people, it will be tougher than howsoever easy it may sound.
  • Since your EMI outgo is lower, you will have more surplus left with you and if you need money temporarily for some other important expenses/needs, then it can give you the financial bandwidth to do so.

Benefits of Full-EMI

  • Since the borrower pays the full EMI but interest is only calculated on the lower disbursed amount, the outstanding loan principal goes down much faster. So the loan gets repaid much faster.
  • If you want to become loan-free at the earliest (and you should know that a shorter loan tenure can save you money, lot’s of it), then taking the full-EMI option is better. But when it comes to home loans, you need to be careful about managing home loans wisely.
  • Since delays in construction projects are very common, it would be better to go for the full EMI option if you expect any delays in the completion of the project. That way, you won’t have to wait for long periods to start principal repayment.

Is Pre EMI good or bad? That depends on your requirements and your financial capability to service the Full EMI comfortably without breaking a sweat.

You may ask – Is Pre EMI compulsory?

Generally the lender, as a minimum, would require the borrower to at least begin paying the simple interest on the disbursed loan amount (called the pre-EMI interest). But if one wants to immediately begin principal repayment as well, then the borrower can start with the Full EMI as well.

You may also ask – Can I Convert Pre EMI to EMI?

It’s possible that the bank from which the home loan is taken would be fine with conversion if your home loan repayment is scheduled from Pre-EMI to Full EMI.

And for those who want to understand the Pre EMI meaning in Hindi, here is your answer:

Pre-EMI Interest Vs Full EMI interest (Hindi): प्री-ईएमआई क्या होती है? – ईएमआई (EMI) यानी लोन चुकाने के लिए हर महीने जमा की जाने वाली धनराशि। ईएमआई 2 तरह की होती हैं- पहली प्री EMI और दूसरी रेगुलर EMI. आपको इसका सही मतलब जरूर समझना चाहिए. प्री ईएमआई (EMI) विकल्प सिर्फ अंडर कंस्ट्रक्शन प्रॉपर्टी में उपलब्ध होता है। इसमें होम लोन का डिस्बर्समेंट कंस्ट्रक्शन फेज के पुरे होने पर होता है। प्री ईएमआई (EMI)  विकल्प में होम लोन लेने वाले व्यक्ति को सिर्फ उस समय तक हुए होम लोन अमाउंट डिस्बर्समेंट पर हर महीने इंटरेस्ट (ब्याज) देना होता है।

With all that aside, let’s see what are the tax benefits for home loan in different EMI options.

Tax Benefits of Pre-EMI Vs Full EMI

As you might know, that when it comes to tax benefits for the under-construction house, there are no tax benefits for housing loan repayment before construction completion or you getting the possession.

The benefit for principal repayment (under Section 80C Rs 1.5 lakh limit) done before construction completion cannot be adjusted later. However, the interest paid during the construction period can be claimed as a deduction in 5 equal installments under Section 24 over the next 5 financial years. But remember that the tax benefit on interest payment under Section 24 is limited to Rs 2 lakh for a self-occupied property (no limit on the let-out property). For more details, do read about the tax benefits for under-construction house.

The Home loan EMI starts after possession but the pre-EMI is only applicable on the under-construction houses. So once you purchase an under-construction property on a home loan, your bank/lender might link the disbursal of the home loan amount to the construction stages of the property. In such cases, you would have the choice to either pay pre-EMI or go for the full EMI payments. Which Is Better in Pre-EMI Vs Full-EMI? From the total interest paid perspective, it’s better to go for Full EMI. But of course, that will lead to higher EMI outgo in the construction phase and if that is too much of burden for you (along with paying the rent), then taking the Pre-EMI option might be more comfortable for you.

I hope now you understand what is home loan Pre-EMI and which is better in Pre EMI Vs Full EMI. So that was about taking the Pre-EMI or Full-EMI on home loans in India (2021).

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