Pre-EMI VS EMI – Which Plan Makes More Sense While Availing Home Loan?

Are you planning to invest in an under construction or partially completed project, but facing the common dilemma of which home loan repayment plan makes more sense - Pre-EMI or EMI?

To ease your tension and make your home loan repayment process simple, we have analyzed the two home loan repayment plans in some detail. Read on to find out which is a better option for you- Pre-EMI or EMI!

What is EMI?

EMI is the term used for Equated Monthly Installment. Whenever a borrower takes a loan, he/she has to repay it in a specific time period with interest. Thus, he pays a certain amount on a monthly basis to complete the loan repayment. This amount consists of his principal as well as interest re-payment on home loan.

What is Pre-EMI?

Under the Pre-EMI option, the borrower is required to pay only the interest on the loan amount that will be disbursed as per construction progress. The actual EMI payment will start after the possession of house.

Now, whether you should go for the Pre-EMI schemes or the EMI ones depends on many factors. If the developer takes four years to complete the project, it means that the buyer would have to pay the interest amount for four years, which is comparatively less than paying the full EMI. However, it is not what it looks like at first glance. 

The two important facts that one should always remember at the time of selecting the payment option are:

• Time to repay loan
• Monthly cash outflow

Time to repay loan

In case of Pre-EMI, time taken to repay the loan depends on both possession dates and loan tenure. For example: If the developer takes four years to hand over the apartment and the loan tenure is 20 years, then the buyer would have to pay for 24 years in total. In case of project delay, time to repay loan would be longer.

On the other hand, if you pay the full EMIs, the pay-out will be only of loan tenure i.e., 20 years in last example.

Monthly Cash Outflow

In Equated Monthly Installment (EMI) scheme, payouts are calculated on the total amount. In the Pre-EMI option, the loan payments are calculated only on the real loan disbursement. For example: If the borrower has applied for the loan amount of Rs. 10 lakhs but the bank has disbursed only Rs. 3 lakhs. In this case, the borrower needs to pay interest on Rs. 3 lakhs only. The main loan repayment starts when the complete loan amount i.e. Rs. 10 lakhs is disbursed whereas in EMI he has to pay full EMI as per 10 lakh loan amount.

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Tax Benefits

Under both the schemes, Pre-EMI or EMI, there is no change in the tax treatment and the borrower will not get any benefits in the tax deduction till the project is under construction. Once the buyer gets the possession, the value of the total interest paid will be aggregated and divided into five equal installments. It will be considered for the tax deduction for the first five years from the date of final disbursement.

So which is the better option- Pre-EMI or EMI?

Considering all the above observations, paying full EMI is more beneficial in the long run as the borrower starts repaying the principal amount from day one and becomes habitual of EMI by adjusting earnings and savings to pay EMI. However, it may not necessarily be the best option in the following cases:

• If the possession of project is delayed for a long time, the borrower may actually end up repaying larger principal amount, even before getting the possession of the property.

• If you are an investor and wish to sell the property immediately after the possession of the house, then the Pre-EMI option is better than paying the full EMI.

For more tips on Home Loan or Home loan repayment plans, visit our website PropTiger.com