What is Pre-EMI and How to Calculate It?

Purchasing a house with savings accumulated over time is an insurmountable challenge, one that is nearly impossible today.

Considering the humongous population and relative scarcity of land, property rates are steadily rising, and they are expected to continue to rise as people's purchasing power rises concurrently.

Home loans are thus the most popular way for people to purchase a home. These loans can be repaid through equated monthly payments spread over tenures lasting up to 30 years.

It is crucial to choose a lender with =affordable home loan interest rates. If you have chosen to purchase a house that is still under construction, you will need to pay pre-EMIs.

Choosing Between Pre-EMI and Full EMI:

Pre-EMI: If you have limited cash flow during the construction phase of your property, opting for pre-EMIs can help ease your financial burden temporarily. However, it's essential to note that this option leads to higher overall interest payments in the long run.

Full EMI: Opting for full EMIs right from the start is generally the more financially prudent choice. While it may be slightly more challenging in terms of cash flow initially, it helps reduce your interest burden and allows you to repay the principal amount faster, ultimately saving you money over the loan tenure.

As a borrower, you need to understand the different types of EMI pre-EMI vs full-EMI. Let us first understand what full-EMI means to better understand the nuances and calculation of Pre-EMI.

Pre-EMI meaning

Pre-EMI on home loan is an alternative that borrowers can opt for only if they’re taking on a home loan for a property under construction. Borrowers typically choose this option as lenders generally disburse loans partially or in phases for houses under construction, and borrowers are required to pay only the interest portion of the loan as EMIs, instead of the full EMI, until the entire loan amount is disbursed.

Considering the humongous population and relative scarcity of land, property rates are steadily rising, and they are expected to continue to rise as people's purchasing power rises concurrently.

Calculation of Pre-EMI with an Example

Let us continue with the above example where a borrower is taking a Rs 30 lakh loan at 8% interest over a period of 20 years. However, let’s assume the borrower is taking a loan for an under-construction property that is due to be completed in 3 years. Also, let’s consider the borrower opted for a Pre-EMI loan.

Now, being an under-construction property, the bank does not disburse the entire amount, but in tranches as the construction progresses during these 3 years.

Assume that the bank pays the borrower Rs 3 lacs at the outset of the loan. The borrower pays interest only on this amount of Rs 3 lacs, which amounts to Rs 2,000 per month (Rs 3,00,000 * 8% / 12 months). The bank now disburses another Rs 3 lacs to the builder after 6 months. As a result, an amount of Rs 4,000 must be paid as pre-EMI for a total of Rs 6 lacs. The Pre-EMI amount increases with the total amount disbursed so far.

As shown in the following illustration, the total payment during the Pre-EMI is as follows:

Nevertheless, he pays Rs 9,03,348 towards the regular loan repayment and is included in the 20-year term of the loan, whereas Rs 2,68,000 paid towards Pre-EMI is not included in the 20-year term and does not have any bearing whatsoever on the monthly payment including the principal and interest component, which is due after the end of the Pre-EMI period. As a result, in the example above, the total effective tenure of the loan is three years of pre-EMI period and twenty years of full-EMI period, resulting in a total of 23 years.

Pre-EMI includes only the interest amount and is, therefore, cheaper than Full-EMI, which also includes the principal component.

The Pre-EMI duration, however, is not included in the original tenor of the loan. Pre-EMI period extends over and above the loan's actual term. This means that the borrower will end up paying more interest than he would have otherwise.

Full-EMI meaning

The term Full-EMI refers to the monthly payments based on the sum of the loan amount approved or sanctioned and made immediately after the first disbursement, regardless of whether or not the lender disburses the entire principal amount or does so in tranches.

• Both the interest and principal components are paid in equated monthly instalments for the selected tenor.
• EMIs are paid according to the sanctioned amount and not the disbursed amount.

Example of Full-EMI

Let us assume you were approved for a loan of Rs 30 lakhs at 8% over a period of 20 years. If you use our home loan EMI calculator to calculate the resulting EMI it will be Rs 25,093. This is the full-EMI amount. Let us now consider you have taken this loan for an under-construction property. Here, you have taken the disbursement for the first tranche of Rs 3 lakhs. Now even though the disbursement amount is only Rs 3 lakhs, you may be asked to pay EMI on the entire loan amount of Rs 30 lakhs i.e Rs 25,093. This depends on your lender. Your lender may ask you to pay the full-EMI, or a pre-EMI depending on their policy.

Pre-EMI vs Full-EMI

Let us see some of the pertinent differences between Pre-EMI and Full-EMI:

• Difference in loan disbursal: You can request full disbursement if you choose full EMI, whereas pre-EMI requires partial disbursement.
• Difference in loan repayment: Pre-EMIs are significantly cheaper than full EMIs, where you are required to pay the full amount regardless of the loan amount disbursed.
• Difference in interest rate: Rates for full-EMIs are calculated according to the entire principal amount. The pre-EMI interest rate is calculated based on the disbursed loan amount.

When you should choose the Pre-EMI option

• In addition to the loan repayment EMI, the individual has less money to pay the rent.
• In the first few years after construction, the borrower plans to sell the property.
• After construction is complete, the applicant wishes to sell the property.
• Customer is experiencing a financial crisis and urgently needs credit.
• For higher returns, the individual wishes to invest the difference between the Pre-EMI and the Full-EMI, which can be accrued, and then carve out amounts from those funds to pay back the loan according to the amortisation schedule.

Tax Benefits

There is not much to differentiate. There are no tax benefits for home loan repayments before you get possession. Section 80C provides a maximum benefit of Rs 1.5 lakhs per fiscal year for principal repayment. For a self-occupied home, the tax benefit for interest payments under Section 24 is capped at Rs 2 lacs (no cap for let out property). After you take possession of the house, you can take advantage of these benefits.

Principal repayments made before possession cannot be adjusted later. In the case of interest payment, however, the interest paid during the under-construction period (before possession) can be added up and divided into five equal instalments. Section 24 allows the claimant to deduct these five instalments over the next five years.

Must Read : How Much Tax benefits can I Avail on my Home loan

Conclusion

Having gained a basic grasp of full-EMI and a detailed overview of pre-EMI, it is time to check your home loan eligibility as well as crunch the numbers using a home loan EMI calculator. The pre-EMI is generally used for borrowers who do not want to place a heavy burden on their wallets during the initial years of house construction, but envision a significant change in circumstances that will enable them to pay full-EMI after the pre-EMI period expires, or they seek another investment opportunity that offers exponential returns, which can offset both the Pre-EMI interest and the full-EMI loan repayment amount while still providing high returns. Home ownership is a long-cherished dream for many of us, and the availability of Pre-EMI loans makes this dream a reality.

Note: This article is for your information only. Terms and conditions related to pre-EMIs, home loans, and eligibility will depend on SMFG Grihashakti’s policies at the time of loan application. Please contact us to know more.