EMI vs Pre EMI

Apr 06, 2015 7:45 IST 709 reads,

Mr. Ravi wants to apply for a home loan but he is in a serious dilemma about its repayment option. EMI….Pre-EMI…EMI….What is better? Like Ravi, many of you are in dilemma – what is better EMI or Pre EMI? Let’s have a glance on the aspects related to these repayment options and then you can decide for yourself how you will repay your home loans.

What is a full EMI?

EMI stands for equated monthly installment. The borrower pays fixed installment to a lender on monthly basis. EMI =Principal + Interest on Principal Amount. The good thing is that it can be repaid before the end of your home loan tenure.

What is Pre EMI scheme?

Pre EMI means you have to pay the interest amount only on the disbursed home loan amount. Once you receive the keys to your dream home, your full EMI begins for a home loan.

In a case of under construction property, the banks and financial institutions disburse home loans in tranches. Generally, the lender disburses the home loan in 3-6 tranches and their disbursal relies on the basis of completion of the project.

Pre EMI Scheme is devised in such a manner where the applicant has to bear the stress of EMI on the interest component of the sanctioned home loan amount.  Once, the borrower takes possession of the property, his actual repayments start on.

How are these calculated?

Mr. Anil availed home loan with Pre EMI scheme.  For 1 year, when his home was under construction, he paid the interest portion on the disbursed home loan amount only. Firstly, he has sanctioned Rs 10 lac on 1st Jan, Secondly, he has sanctioned another Rs 10 lac on 1st July. The next two tranches of Rs 10 lac each was disbursed on 1st October and then 31st December.

His Pre EMI was (8750 x 6) + (17500 x 3) + (26250 x 3) = ₹ 2, 36,250. When he took the keys of his dream home and paid all the Pre EMIs, his actual EMI started for a home loan.

For next 25 years, he paid the EMI on entire principal and interest component. The math equation shows he was in debt for 26 years. How extra 1 year can be justified, we will discuss this later on our blog.

What is better?

Both EMI and Pre EMI have its own advantages and disadvantages. Take decision after reading out the suitable situations –

Pre-EMI is suitable in the following situations –

1)    Let’s say, you are staying in a luxury rented apartment and want to live there continuously. Simultaneously, your cash inflow is less in initial years, and then Pre EMI will be a good option.

2)    The property is under construction and you are in need of money, so don’t pay the hefty EMI initially

3)    When you want to sell the property instantly after taking the possession of the same.

4)    When you want some reserve fund for meeting emergency situations

EMI is beneficial in following circumstances –

1)    In case you want to enjoy the tax benefits on property

2)    If you are buying property for long term investment

3)    If you want your property to be the debt free as early as possible

Conclusion – EMI and pre-EMI are financial decisions which rely on builder’s reputation, existing market conditions, and resale value of your project, your income & expenditure.

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