Property prices have been skyrocketing in recent times. Purchasing a house outright is very difficult today. The only way to finance your home is through home loans. Selecting a loan provider with minimal home loan interest rates is essential.
Repayment of home loans can be made in multiple ways, but you should be wise enough to choose between pre- and full EMI options. Proper knowledge in this area will be helpful in the management of your financial resources while your home is constructed. Read on to learn more about full EMI and pre EMI meanings.
What Is Pre-EMI?
Pre-EMI is the monthly payment of the interest amount applicable on the home loan. The payments are made when your house is under construction. As the principal amount is not considered for payment, the pre-EMI payment is lesser than the full EMI payment. The pre-EMI period ends once your house is constructed and is not included in the home loan tenure. This repayment method is majorly designed for individuals with limited finance.
When Is Pre-EMI Ideal?
- A Pre-EMI can be ideal when you have to pay house rent as well service your home loan.
- Since the amount in case of Pre-EMI payment is lesser as compared to Full-EMI, you can manage the cash flow better and invest the amount saved to generate short-term revenues or for other purposes or make a higher down payment
- Opt for a Pre-EMI payment if you wish to sell the property after the completion of its construction.
Here’s an Example that will help you understand Pre-EMI in a better way:
Let’s assume you avail a home loan of Rs50 lakh at an interest rate of 8.5% p.a. for a period of 20 years to purchase an under-construction property. The construction will be completed in 2 years, during which you choose to pay pre-EMI. On completion of the property, the Pre-EMI payment ends, and regular EMI repayment period commences. Thus, the total home loan tenure would be 2 years (pre-EMI period) + 20 years (loan tenure) = 22 years.
For a home loan of Rs 50 lakhs, if you opt for a disbursem*nt tranche of 5 lakhs, your Pre-EMI will be Rs. (5 lakhs x 8.5%/12) = Rs. 3,542. In case you take another disbursem*nt of Rs 10 lakhs after 6 months, your EMI will increase to Rs 10,625 (Rs 15 lacs x 8.5% /12). It must be noted that in case of Pre-EMI, the entire amount paid will go towards the interest payment and not the principal repayment.
What Is Full EMI?
Full EMI payments include both principal and interest amounts. These payments start after your house is fully constructed. Some financial organizations allow the commencement of full EMI payment even when the home loan is still under disbursem*nt. Under this option, the outstanding loan amount and interest are paid during the loan tenure.
When Is Full-EMI Ideal?
- If you wish to repay the home loan sooner, it is a good choice to opt for a Full-EMI right from the beginning of the home loan tenure, even if the home possession is some time away.
- If you want to save on interest pay-out over the long term, a Full-EMI is advisable and should be preferred.
- Opting for Full-EMIs is better than Pre-EMIs, if your financial situation and cash flow allows you to do that.
Let’s understand Full-EMI with the help of an Example
Suppose you have taken a home loan of Rs. 50 lakhs for an under-construction property. You have opted for a Full-EMI hence you pay EMI on entire loan amount of Rs 50 lakh. At a rate of 8.5% p.a., the Full-EMI for a loan of Rs 50 lakh for 20 years will be Rs 43,391. By paying Full-EMI, you will be able to pay off your home loan sooner.
Differences Between Pre EMI vs Full EMI
| Point | Pre EMI | Full EMI |
|---|---|---|
| Loan Disbursem*nt | Disbursed in parts | Entire loan amount disbursed |
| Loan Repayment Period | Longer repayment period | Shorter repayment period |
| Calculation of Interest Rates | Interest on disbursed amount | Interest on principal loan amount |
| Impact on Principal Amount | No impact on principal or tenure | Decreases principal and tenure with payments |
| Commencement of EMI Payments | Start during construction | Start after construction completion |
| Impact on Financial Resources | Easier to manage during construction phase | Might be challenging due to full payments |
| Right to Sell the Property | Can sell after construction or during | Limited ability to sell property |
- Loan Disbursem*nt: The entire loan amount is disbursed under the full-EMI option. Whereas, under the pre-EMI option, the loan disbursem*nt occurs in parts.
- Loan Repayment Period: As the full-EMI payment includes the principal component of the loan amount, the loan repayment is sooner when compared to the pre-EMI home loan.
- Calculation of Interest Rates: The pre-EMI interest is calculated depending on the amount of loan disbursed. On the other hand, the full-EMI interest calculation depends on the principal loan amount.
- Impact on Principal Amount: The principal loan amount and the loan tenure decrease with each monthly EMI payment under the full-EMI option. There is no impact on the loan tenure, principal loan amount or interest rate under the pre-EMI option.
- Commencement of EMI Payments: Pre-EMI payments start when the house is under construction. On the other hand, under the full-EMI option, monthly EMI payments begin only after the construction of the house is completed.
- Impact on Financial Resources: As only the interest amount is paid in the pre-construction stage under the pre-EMI home loan, it is easier to manage your financial resources. Whereas you might find it challenging to repay the loan amount under the full-EMI option.
- Right to Sell the Property: It is possible to sell the property as soon as the construction is completed or after a few years of its construction under the pre-EMI option. You cannot sell the property for a fixed period under the full-EMI option.
Tax Benefits for Pre EMI & Full EMI for Loans
There are equal tax benefits for pre- and full-EMI home loan repayment methods. You cannot claim a tax deduction during the construction period of the property. However, after possession of the property, interest payments (under the pre-EMI or full EMI method) will be totaled and is applicable for a tax deduction in 5 uniform installments. You can claim these installments as a deduction under Section 24 in the succeeding five fiscal years.
Under Section 80C, the tax benefit for the repayment of the principal amount is limited to INR 1.5 lakhs per fiscal year. The tax benefit for payment of the interest amount under Section 24 is limited to INR 2 Lakhs in the case of a self-occupied residential property. However, there is no limit for a property let out on rent or lease.
Regarding tax benefits, there is no significant difference between the pre-EMI and full-EMI methods. Therefore, the tax benefit is not essential when selecting the two methods.
Opt for the Full-EMI Option under the Following Scenarios
Here is a list of conditions wherein it is suitable to select the Full-EMI loan repayment option:
- When the purchased property is going to be a long-term investment.
- When you plan to repay the loan in good time.
- If you wish to claim tax benefits right after the commencement of the repayment period.
- When a delay is anticipated in the construction of the property.
- When you don’t have a more suitable option to invest the funds.
Opt for the Pre-EMI Option under the Following Scenarios
Here is a list of scenarios wherein it is beneficial to choose the Pre-EMI loan repayment option:
- When you have limited financial resources to pay rent and the EMI payment.
- If you plan to sell the property within a few years of its construction.
- If you wish to sell the property as soon as the house is constructed.
- When there is a shortage of funds, and you urgently need a loan.
- When you wish to earn better returns by further investing the difference amount between Full-EMI and Pre-EMI options.
Also Read: JharBhoomi : Jharkhand Land Records Online
Conclusion
Now that you’ve learnt about pre-EMI and full-EMI loan repayment options use a home loan EMI calculator to determine the required funds. It will help you to make an informed decision. Altogether, if you wish to repay the loan soon, then full EMI is a better option as the principal amount is paid from the start.
