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Pre-EMI vs Full EMI – Understanding Payment Schemes for Under-Construction Properties

If you take a home loan to purchase an under-construction property, the lending entity or bank can link the allocation of the loan to the construction stages of that property. For the repayment of such loans, the borrower will get the option for pre-EMI or full EMI payments. These EMI can be calculated easily by using the calculatoremi.com Home Loan EMI Calculator.

Pre-EMI vs Full EMI are two housing loan repayment schemes that have different effects and implications on the loan and borrower. In this article, we’ll closely look at both of those if you are planning to apply for a home loan for an under-construction property. 

What is Pre-EMI?

In a general sense, EMI, short for Equated Monthly Instalment, is a computation of Principal and Interest components. However, pre-EMI is the interest portion on the disbursed loan only. Furthermore, a borrower must pay the interest amount of the disbursed loan until the full amount is allotted. This means your home loan is like an interest-only loan on the disbursed amount until the construction is completed. After the pre-EMI duration, the Full EMI starts. Once that is done, your loan amount will reduce the outstanding loan amount.

For instance, if you apply for ₹ 40 lakhs with an interest rate of 10.5% and a tenure of 20 years for an under-construction property. Further, assume that the bank disburses the loan in 4 stages.

Month

Stage

Amount Disbursed

Pre-EMI

01-Jan

Agreement

₹ 10 lakhs (20%)

₹ 8,750

01-Jul

Completion of the foundation and ground floor

₹ 10 lakhs (20%)

₹ 17,500

01-Oct

Completion of the first and second floor

₹ 10 lakhs (20%)

₹ 26,250

31-Dec

Completion of the third floor and possession

₹ 10 lakhs (20%)

₹ 39,935 (EMI)

As shown above, the interest-only pre-EMI payment will be (8750 x 6) + (17500 x 3) + (26250 x 3) = ₹ 2,36,250 for the distributed loan amount. After that, the full EMI of ₹ 39,935 for a loan tenure of 20 years starts from 01-Feb, a month after the complete disbursal of the loan.

Pre-EMI vs. Full EMI

Pre-EMI vs Full EMI

Unlike that pre-EMI and interest-only payment on the disbursed amount, several banks allow you to pay full EMI. Furthermore, you get the option of complete payment even when the loan allocation happens in stages. The alternative of ‘EMI under construction’ starts the EMI from the beginning of construction. Additionally, your interest amount is evaluated based on the amount disbursed to the contractor. The remaining amount will be taken as the principal. Resulting in the principal portion of the to be higher for quick loan repayment while the EMI remains the same.

Which one would you choose if given a choice between pre-EMI vs. complete EMI for loan repayment during the construction? There are a few statements in favor and against the subject. You can refer to the following scenarios where the sense of the full EMI falls short.

  • Keep in mind that during the first loan term, you have to pay more interest and less principal.
  • After the construction, you look forward to selling the property.
  • You need to be financially ready and face difficulties. 
  • You are anticipating receiving a pay boost before taking possession of the home.
  • Paying the rent and the EMI simultaneously can lead to a debt trap. 

However, paying full EMI will ensure that you experience the utter satisfaction of paying off a portion of the outstanding loan amount at the time of possession.

What if the Builder Agrees to Pay the Pre-EMI?

Most lenders and builders have a pack of schemes for under-construction projects that are complicated to understand for buyers. Furthermore, many lenders formulate these innovative schemes to entice buyers; one of those is the 80/20 scheme.

80/20 (or 90/10 or 75/25) scheme

This scheme is more of a fraud where buyers put down 10–25% on the house, with the remaining funds being disbursed by banks or home finance companies. The scheme of fooling the buyer with the Advance Disbursal Facility (ADF) by banks, in which the builder or contractor receives the entire loan amount up front without any connection to the stages of construction. Most of the time, the builder would offer to cover the pre-EMI for the buyer for a specific amount of time. Due to such unfriendly programs between borrowers and builders would give developers access to money at lower interest rates. Thus, the buyer is left alone and in the middle of nothing if the builder delays either the pre-EMI payments or the project itself. The RBI noted this and asked banks and HFCs against implementing anything like this.

To put it simply, never fall for the builder scheme and don’t agree to advance disbursal, even if this is the only exciting project.

Tax Considerations

The tax deduction has no significant benefits with either pre-EMI or full EMI Calculator. Interest paid during the construction phase is not tax-deductible, whether it was included in the pre-EMI or the full EMI. Furthermore, the interest component of the pre-EMI is aggregated once you’ve received the possession certificate, and deduction is permitted in five equal installments starting in the year that the building is finished.

For instance, you can write off ₹40,000 each year for the first five years starting from the date of the final disbursement if the total interest paid throughout the construction period was ₹20,00,000.

 

Visit Here :-  What Will Be The EMI For 1 Lakh

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