Understanding the difference between EMI and Pre-EMI


               


Financing your new home with a home loan gives you various options related to repayment. While choosing a lender with nominal home loan interest rates is important, also choose wisely between Pre-EMI and Full EMI. This will help you manage your financial resources better as your home is constructed. Understanding the difference between EMI and Pre-EMI is important and here’s what you need to know.


FULL EMI: Full EMI repayment of a home loan is the payment of principal as well as interest. This payment begins once the construction of the house/ building is completed. Some banks also permit commencement of full EMI payment while the loan amount is being disbursed in stages. If you have opted for the pre-EMI payment option, EMI payment will commence once the pre-EMI phase ends. By paying the full EMI, the interest is repaid and the outstanding loan amount will be reduced during the loan period.


PRE-EMI: Pre EMI is an option that borrowers can choose only if they are taking on a home loan for a property which is under construction. This is an option most borrowers choose because lenders disburse the loan amount partially and borrowers only have to pay the interest component of the loan and not the entire EMI (consisting of both principal and interest payment), until the entire loan amount is completely disbursed. You can start repaying the full EMI amount once the entire loan amount sanctioned is completely disbursed. Typically, you can pay pre-EMIs for a period lasting up to three years, under which construction should be completed.


PRE-EMI IDEAL SITUATION: Pre-EMI is Ideal for those who wish to save money during the pre-EMI period and invest it in such a way that they get good returns on the amount. The opportunity cost of the money that would have to be paid as full EMI and that which could be accumulated and invested in a good savings scheme will help determine which repayment option to choose. For example, Consider the full EMI payment is Rs. 25,000 out of which the interest contribution is Rs. 5,000. By choosing to pay pre-EMI only, i.e., Rs. 5000 interest only, the borrower can invest the remaining Rs. 20,000 elsewhere and earn consistent returns. This can be accrued to pay the EMI at a later stage. The pre-EMI option is also ideal for property investors who wish to sell the property once construction is completed. Those who are waiting for a change in income capacity or cannot afford to pay full EMI at the moment, will find pre-EMI payment to be the best option.


FULL EMI IDEAL SITUATION: If you want to reduce the long-term financial obligation of a home loan, start paying the full EMI at the earliest. This way you save on additional interest costs that may incur when you finance home. If you foresee a delay in construction, choose Full EMIs. This is because the pre-EMI payment continues until completion of construction, and this means you will end up paying a larger amount as interest on your home loan.


TAX BENEFITS: There is no difference in the tax implications whether you choose to pay Pre-EMI or Full EMI. Remember, tax deductions on your home loan interest are not applicable until the construction of your property is complete. On obtaining the possession certificate, the amount you have paid as interest will be totalled and the same will be considered for tax deduction in 5 equal instalments.



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