With a growing population and limited land availability, buying a home solely with accumulated savings has become increasingly challenging. Rising property prices further impact buyers' purchasing power, making home loans a preferred solution for aspiring homeowners. These loans allow repayment through Equated Monthly Instalments (EMIs) over flexible tenures of up to 30 years.

If you're purchasing a property under construction, lenders often offer the option of paying pre-EMIs – a payment structure that can help manage finances more efficiently during the construction phase.

Let’s explore what pre-EMI is, how it is calculated, its tax implications, and other key details.

Understanding the Pre-EMI Meaning

Typically, home loan borrowers repay EMIs that include both principal and interest. However, with a pre-EMI, homebuyers pay only the interest on the disbursed loan amount, while the principal repayment starts later. This results in lower, more affordable monthly payments during the construction phase. Once the property is completed, the borrower begins paying the full EMI, which includes both principal and interest.

Benefits of Pre-EMI

The benefits of choosing a pre-EMI payment plan include:

Lower Initial Financial Burden

Since you only pay the interest component until construction is completed, your initial financial burden is significantly reduced compared to full EMI payments.         

Potential Investment Advantage

If property values appreciate over time, pre-EMI can be beneficial. You may choose to sell the property at a profit before full EMI payments even begin, potentially earning returns on your investment (may be subject to lender approval).

Easier Rent and Loan Management

Lower monthly payments during the construction phase make it easier to manage loan repayments – especially if you're also paying rent.

Better Cash Flow and Financial Planning

With reduced monthly payments, you can allocate savings toward personal expenses or other investments, ensuring greater financial flexibility before full EMIs start.

Calculation of Pre-EMI with an Example

Let's look at an example to understand how to calculate pre-EMI.

Suppose a borrower takes an INR 30 lakhs home loan at a 10% annual interest rate for 20 years. However, since the property is still under construction and will take 3 years to complete, the borrower opts for a pre-EMI loan instead of a full EMI repayment.

Since it’s an under-construction property, the lender does not disburse the entire loan amount at once. Instead, the lender releases it in phases based on construction progress. The borrower pays interest only on the disbursed amount.

For instance, if the lender releases INR 3 lakhs at the start, the borrower pays interest only on this amount, which comes to around INR 2,500 per month (INR 3,00,000 × 10% ÷ 12 months).

After six months, the lender releases another INR 3 lakhs, making the total disbursed amount INR 6 lakhs. As a result, the pre-EMI amount increases to around INR 5,000 per month, since interest is now calculated on the increased loan amount. As the lender continues disbursing more portions of the loan, the pre-EMI amount keeps increasing until the full loan is disbursed.

When construction is completed after 3 years, the borrower moves to full EMI payments based on the total loan amount of INR 30 lakh over a 20-year tenure. However, note that the pre-EMI payments made during the 3-year period, amounting to approximately INR 3,22,500, do not reduce the principal loan balance.
So, even after making these payments, the borrower still owes the full INR 30 lakh loan amount and must repay it over the next 20 years.

Thus, the overall tenure of the loan extends to 23 years – 3 years of pre-EMI plus 20 years of full EMI repayment. While pre-EMI helps reduce the initial financial burden, it ultimately increases the total interest costs over the loan’s lifetime.

When Should You Choose the Pre-EMI Option?

Opting for a pre-EMI plan can be beneficial in the following situations:

• When the borrower has limited funds and cannot afford full EMI payments.
• If they are already paying rent and need to reduce financial strain.
• When the borrower plans to sell the property within a few years after construction.
• If the borrower needs lower repayments due to temporary financial constraints.
• When borrowers intend to invest the savings from the difference between pre-EMI and full EMI, potentially using the returns to repay the loan later.

Understanding the Full EMI Meaning

Full EMI refers to payments that include both the principal and interest components of a home loan. Unlike pre-EMI, full EMI is calculated based on the total sanctioned loan amount, not just the disbursed amount. These payments typically start immediately after the entire loan is disbursed.

Benefits of Full EMI

Opting for a full EMI payment plan offers the following advantages:

Faster Loan Payment

Since full EMI includes both principal and interest from the start, it helps reduce the outstanding loan balance more quickly.

Fixed Tenure 

Unlike pre-EMI, where the loan tenure effectively extends, full EMI ensures a fixed repayment period. Since the principal is repaid from the beginning, the overall interest paid is lower, and the loan is completed within the originally agreed tenure.

Lower Exposure to Construction Delays

Borrowers paying full EMIs are less affected by construction delays, as their repayment structure does not depend on phased disbursements.

Example of Full EMI

To better understand what a full EMI is, let’s look at an example.
Suppose you have an approved loan of INR 30 lakhs at a 10% annual interest rate over 20 years. Using a home loan EMI calculator, the resulting full EMI would be approximately INR 28,951.

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Pre-EMI vs Full EMI

Let’s break down the key differences between pre-EMI and full EMI:

• Loan Disbursement - In a full EMI plan, the entire loan amount can be disbursed at once. However, in a pre-EMI plan, the lender disburses the loan in phases based on construction progress.  
• Loan Repayment - Pre-EMIs are more affordable initially, as you pay only the interest on the disbursed amount. In contrast, full EMIs include both principal and interest, leading to a higher monthly payment.
• Interest Rate - In a full EMI plan, interest is calculated on the entire sanctioned loan amount from the start. With pre-EMI, interest is charged only on the loan amount disbursed until full repayment begins.

Choosing Between Pre-EMI and Full EMI

If you have limited funds during the construction phase of your property, the pre-EMI option can help by reducing your immediate financial burden with lower monthly payments. However, since principal repayment is delayed, you may end up paying higher interest over time once full EMI begins.

For those with sufficient funds during the initial construction phase, opting for full EMI could be the better choice. While the initial payments are higher, it helps reduce the principal faster, leading to lower overall interest costs and quicker loan repayment.

Tax Benefits

There are no significant differences in tax benefits between pre-EMI and full EMI. Under Section 80C of the Income Tax Act, borrowers can claim a maximum deduction of INR 1.5 lakh per year on principal repayment, but only after taking possession of the property.

Under Section 24(b), a tax deduction of up to INR 2 lakh per year is available on interest payments for self-occupied properties, whereas for let-out properties, there is no upper limit on interest deductions.

Interest paid during the under-construction phase (pre-EMI interest) cannot be claimed immediately but can be divided into five equal instalments and deducted over five years, starting from the year the property is ready for possession.

Conclusion

Both pre-EMI and full EMI have their advantages, and the right choice depends on your financial situation and goals. Pre-EMI offers lower initial payments, making it ideal if you need more flexibility during construction, but it can increase the overall loan tenure and interest paid. On the other hand, full EMI starts principal repayment immediately, helping you clear the loan faster and reduce total interest costs, though it requires higher payments upfront.

When making an informed decision, consider factors like income stability, the property’s construction timeline, and long-term financial plans.

When you’re ready to take the next step, SMFG Grihashakti is here to help you realise your dream of homeownership. We offer tailored home loans of up to INR 1 crore* with competitive interest rates and flexible tenures of up to 30 years*. Check your eligibility and apply online today!