Pre- EMI: All You Need to Know

Buying a home is undoubtedly the most prominent financial choice you and your family will ever make. For most first-time home purchasers, obtaining a house loan is the only option to realise their dream of homeownership.

If you want to take out a house loan, it’s critical to understand everything about it; after all, it’s a commitment that will last for years until you can back the whole loan amount. Do you know that they are two ways to structure your EMI repayments? Yes – Pre-EMI and full EMI. Because of lack of awareness, not many know the difference between the two is critical since it may significantly reduce your loan load. So, let’s find out all you need to know about house loan pre-EMIs:

What is Pre-EMI?

EMI is an abbreviation for Equated Monthly Instalment. This is the monthly payment you must make to the lender. It consists of repaying the principal amount as well as paying interest on the loan’s outstanding balance.

Pre-EMI is a term used to describe a loan repayment for a property which is under construction. In this instance, your loan is disbursed in phases depending on the quantity of instalment payments you must make to the developer. In most cases, you must begin paying the interest on the loan amount disbursed, called the pre-EMI interest. 

Pre-EMIs can help you save money on your loan payments by allowing you to pay only the pre-EMI interest. You begin paying the principal portion as soon as you move into your new house. The pre-EMI term lasts typically three years, after which you must start paying the entire EMI, regardless of whether you have acquired ownership or not.

What is The Benefit of Choosing Pre-EMI?

If you can afford to start paying the EMI, that is, both principal and interest, from the start, you will be able to lower the outstanding principal as well as the duration from the first month. While paying monthly EMIs reduces the amount and length of the loan, there are occasions when people are unable to do so. Those who live in high-rent areas and do not have the money to begin the EMI right away may decide to start paying ‘interest-only’ on the partially disbursed sum, which is known as Pre-EMI. Customers can also opt to transition from the Pre-EMI to the EMI stage at any time before taking ownership. 

When should you use the Pre-EMI option?

• You can select this option if your cash flow is limited, and you will be unable to pay the EMI.
• You can use this strategy if you have an urgent credit requirement and wish to save money for it.
• Because pre-EMIs are cheaper than EMIs, you can invest the difference to earn better profits.
• When it comes to house loans, you might pay Pre-EMIs to the lender if you intend to sell the property soon after it is built or within a few years.

What are the elements to evaluate before determining the Pre-EMI option?

The Pre-EMI option is an additional advantage that allows the borrower to repay the loan’s interest amount without affecting the loan term or amount. As a result, this facility should be utilised with caution. Customers should examine the considerations listed below before using this option in order to avoid bad debt and extra costs.

• Evaluate how much money you have available to repay the loan.
• Assess if you will be able to pay the EMI as well as any other sudden or foreseeable expenditures.
• Determine the purpose of the property acquired using the loan.
• Inspect whether there will be any returns on the purchased property.
• In the case of a house loan, consider if the property will be used for personal purposes or whether it will be sold after the building is done.
• Calculate the entire opportunity cost of the money you want to save.
• Compare different investment alternatives to see if you can achieve more significant results.

What are the Tax benefits of Pre-EMI Options?

You receive the same tax benefits in Pre-EMI options as in full-EMI repayment schemes. You cannot claim a tax deduction for the interest you repay through pre-EMI options during the construction period before taking ownership. However, after receiving the ownership certificate, following possession and the lock-in period (if applicable), the amount paid in interest is combined and evaluated for a tax deduction in five equal instalments. Indian Income Tax Act Section 24 governs tax deductions for house loan interest repayment. There is a deduction limit of Rs. 2 lakh per fiscal year.

What are the Risks Involved in the Pre-EMI Options?

• Few lenders do not permit the borrower to pre-close the loan partially while paying a Pre-EMI. 
• The primary dangers in a Pre-EMI system are construction delays and stalled projects. If there is a delay in possession for whatever reason, the client will be forced to pay a Pre-EMI.
• Sometimes the lender would enrol the consumer in the Pre-EMI option without verifying beforehand. This is extremely risky.
• Your payback begins only after you have the possession. So, whatever you’ve paid so far hasn’t lowered your principal or tenure. If you chose a 20-year loan term five years ago and paid Pre-EMI for five years, you will pay 5+20 years. Some lenders include the 5-year Pre-EMI term in the 20 years and amortise your repayment over 15 years, increasing the EMI cost!
• You do not save any tax benefit by paying the lender interest-only, and some lenders do not issue interest certificates at all.

Sum It Up:

The majority of purchasers finance their new house with a home loan. It is essential to pick a lender who charges a low-interest rate. Choosing a pre-EMI plan is a tactical decision you must make as a buyer. You must take into account the current market conditions, revenues, and expenditures, as well as the project’s resale value. With complete assurance regarding pre-EMI, you can make a knowledgeable judgement about how to repay the house loan when you purchase your new home.