Pre EMi V/s Full EMI

Lower prices of under construction homes over ready to move in houses have always been an attractive selling point if there is no burning need to find oneself a shelter. Another common feature of any under construction property is buying on an home loan. The lender disburses the loan amount in trances as demanded by builder on different stages of construction. Here ,most of lenders give a choice to the borrower if whether he wants to start repayment in a Pre–EMI mode or pay the entire EMI before the possession of property is received. Although, many borrowers are aware of these terminologies , most of them consider that it a facility provided as a discount by their lender to them.

What is Pre – EMI?

Pre-EMI is simply repayment of interest payable on the amount disbursed by lender, as per the number of days of usage, payable to the lender regularly on a specific day of every month. The interest amount keeps on increasing with the additional amount disbursed and till he receives the possession of the property. The borrower then has to repay as per the EMI schedule. i.e. Repayment of Principal plus interest.

Let us consider an example, if you have taken a loan of Rs. 50 lakhs @ 11% for next 20 years for an under construction property and the lender disburses loan in 4 trances as following:

Month	Stage	Amount disbursed	Pre – EMI – (Rs./pm)
January 1st	On agreement	10 lakhs	9167
June 1st	On completion of foundation work and ground level	10 lakhs	18333
Oct 1st	On completion of next three floors	20 lakhs	36667
Dec 31st	On possession	10 lakhs	51609(actual EMI)

This means you pay (9167 * 5)+(18333*4)+(36667*3) = Rs. 2,29,167 of Pre – EMI towards the disbursed loan amount. After that you would pay an EMI of Rs.51,609 for next 20 years towards your loan.

Who should opt for Pre – EMI mode ?

Pre – EMI is useful for people who due to constraint of funds cannot afford to pay the principal amount of the loan. In case, if the project gets delayed or stalled , you don't have principal to be repaid. It has no other additional benefit.

What are the drawbacks of Pre – EMI?

a) No repayment of principal in the construction period. Thus, the loan tenure is not reduced.

b) In case of delay of project, the interest paid on loan disbursed, where the amount is almost 90%, the borrower ends up paying interest on entire loan amount.

c) If you are paying the EMI from the under construction stage;you can claim all the interest paid in a spread of 5 years, after getting the possession. You can not do so for payment of Pre-EMI in under-construction stage.

d) Sometimes the lender include the under construction phase of Pre – EMI in the loan years. Thus, the amortized value of your EMI increases. For example, if you have a 3 year under construction phase and you have a 15 year loan period, the loan amount is amortized over 12 years. (i.e. 12 loan tenure +3 years of under construction).

Hence, we would like to summarize that don't opt for Pre – EMI in under construction property, unless you are looking to sell off the property on possession or are cash strapped to pay the full EMI.