What is EMI in a Home Loan?
Before we dive into Pre-EMI, it’s important to understand what EMI stands for. EMI means Equated Monthly Installment. When you take out a home loan, the lender asks you to repay the loan amount (called the principal) along with interest over a set period. The repayment is divided into equal monthly amounts, which is known as EMI.
What is Pre-EMI?
Pre-EMI is a term specific to home loans and typically comes into play when you’re purchasing an under-construction property. When you take a loan for a house that’s still being built, the bank disburses the loan amount in stages depending on the progress of construction. Since the property isn’t fully constructed, you are not required to start paying full EMIs right away. Instead, the bank offers you the option to pay just the interest on the loan amount that has been disbursed. This interest payment is called Pre-EMI.
In simple terms, Pre-EMI is the interest you pay on the amount of the loan that the bank has already disbursed, before the full EMI starts.
How Does Pre-EMI Work?
Let’s take an example to make this clearer:
Imagine you’ve taken a home loan of ₹50 lakh for a property that is still under construction. The construction is expected to be completed in 2 years, and the bank disburses the loan amount in parts as the construction progresses.
- Disbursement in Phases: In the first phase of construction, the bank disburses ₹10 lakh. You don’t start paying full EMI yet because the house is not ready for you to live in. Instead, you pay Pre-EMI, which is just the interest on the ₹10 lakh.
- Second Phase: After six months, the bank releases another ₹10 lakh. Now, you’ll pay Pre-EMI on ₹20 lakh, which is the total amount disbursed up to that point.
- Completion: Once the house is complete, the bank disburses the full loan amount of ₹50 lakh. At this point, your regular EMIs will begin, which will cover both the principal and the interest on the full loan amount.
How Pre-EMI Differs From Regular EMI
The key difference between Pre-EMI and regular EMI is in what you’re paying for:
- Pre-EMI: You are only paying the interest on the disbursed loan amount. The principal remains unchanged.
- Regular EMI: Once the entire loan is disbursed (i.e., when the house is ready), you start paying both the principal and the interest through EMIs.
Advantages of Pre-EMI
- Lower Monthly Payments Initially: Since you’re only paying interest during the Pre-EMI period, your monthly payments are lower compared to full EMIs. This can be helpful if you’re managing other financial commitments.
- Flexibility: Pre-EMI gives you the flexibility to delay full EMI payments until the property is ready. This is useful if you don’t want to start full repayment while still waiting to occupy the property.
Disadvantages of Pre-EMI
- Longer Loan Tenure: Since you are not paying any principal during the Pre-EMI period, your loan tenure will be longer. This can result in paying more interest over the entire loan period.
- More Expensive in the Long Run: While Pre-EMI may seem affordable in the short term, it could cost you more in the long run due to the extended interest payments.
Pre-EMI vs Full EMI: Which One Should You Choose?
Choosing between Pre-EMI and full EMI depends on your financial situation and goals:
- Choose Pre-EMI if you want to lower your monthly payments during the construction phase, or if you expect your financial situation to improve in the future.
- Choose Full EMI if you want to start repaying the principal right away and reduce the overall interest cost of your loan.
If you can afford full EMIs from the start, it’s generally a better option because you’ll begin reducing the principal amount of your loan, which in turn will reduce your overall interest cost.
Tax Benefits on Pre-EMI
One important thing to note is that **tax benefits on Pre-EMI payments** are not available until the construction of the property is complete. Once the house is ready, you can claim the interest paid during the Pre-EMI period in five equal installments over five years, as per the Income Tax Act.
Conclusion
Pre-EMI is a useful option for homebuyers purchasing under-construction properties, as it allows them to manage their finances more easily during the construction phase. However, it’s important to weigh the pros and cons before deciding between Pre-EMI and regular EMI. If you can afford to pay full EMIs from the start, it’s generally better to do so, as it reduces your overall loan burden.
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*This Information Is research, you can find your perfect haven in this vibrant city. Remember, this list is a starting point, and several other projects cater to different budgets and preferences. Happy House Hunting!
