Pre EMI vs Full EMI – Pre EMI is EMI paid for before starting an actual EMI of a loan. Pre EMI is generally paid for under-construction properties.
As we know that buying a dream home is very difficult. The cost of real estate is sky-rocketing. You need to shell out a lot of money to purchase or construct your own house. Additionally, you also need to go for a home loan when it comes to buying a dream home. Home Loan comes with Pre EMI and Full EMI. Let’s try to understand – What is Pre EMI? and the difference between Pre EMI and Full EMI.
What is Pre EMI?
EMI stands for Equated Monthly Installment and Pre EMI stands for Previous to Equated Monthly Installment. This means if you borrow money from the bank to purchase a property that is under construction and loan is disbursed partially. You need to pay the interest amount on the disbursed home loan amount. It is known as Pre EMI. Pre EMI contains only the interest component.
Let’s try to understand this by example. Suppose Mr.Ravi wants to purchase a house and he selects one under-construction property. The payment terms for this property is on the percentage completion of construction. It is in four phases linked with milestones. Mr.Ravi applies for a home loan and go for loan disbursement in four stages. Mr.Ravi needs to pay Pre EMI Interest for the disbursed amount. Actual EMI starts when Mr.Ravi takes possession of the property.
Also Read – 10 Best Bank for Home Loan in India 2020-21
What is Full EMI?
Full EMI is EMI applicable to the fully disbursed stage. Suppose you take a home loan and you have taken possession and all property. Once your home loan is fully disbursed EMI applicable on the home loan is Full EMI. Full EMI contains the principal as well as the interest component.
How Pre EMI is calculated?
Mr.Ravi has purchased a property with Pre EMI option of 1 year. He has paid Pre EMI interest for one year as the property was under construction for 1 year and full disbursement was done after 1 year. The first disbursed amount was 5 Lakh on January 1, the Second disbursal of 5 Lakh was on 1st July. The remaining two disbursals of 5 Lakh each was on 1st October and 31st December.
Pre EMI calculation in above case would be – (4375 x 6) + (8750 x 3) + (13125 x 3) = Rs.91875
The formula for calculating Pre EMI would be [P X r X (1+r) ^ n]/ [(1+r) ^ n-1]
Where P is principal, r is the rate of interest and n is the total number of installment.
Note – Above example is for reference only.
Difference between Pre EMI and Full EMI
Pre EMI vs Full EMI
| Pre EMI | Full EMI |
| Loan Disbursal in Parts | Full Loan Disbursal |
| Interest calculated on Disbursed Loan Amount | Interest Calculated on Principal Loan Amount |
| Payment begins on the first disbursal | Payment begins on final disbursal |
| The principal amount does not reduce | Principal Amount will get reduced with payment of EMI |
| No Tax Benefit on Pre EMI for first 2 years | Tax Benefit is applicable on Full EMI |
| Suitable for Property Investors | Suitable for Self Usage Property |
| End up paying extra interest and risky in case of delay in construction | No extra interest amount |
| Loan Payback not started with Pre EMI | Loan Payback started with Full EMI |
Tax Benefits on Pre EMI and Full EMI
Pre EMI and Full EMI both enjoy tax benefits. However, there is no tax benefit for Pre EMI option for the first two years. The tax deduction is not applicable during under construction phase of the property. Once possession of the property is taken and EMI starts you can apply for tax benefits.
The tax benefit is applicable for both principal and interest components paid via EMI. The amount paid as interest in Pre EMI and EMI will be aggregated and considered for a tax deduction in five equal installments.
List of factors to consider before opting Pre EMI
Pre EMI option is costlier. You need to consider the following factors before opting for Pre EMI.
- Your financial condition and capacity to repay debt.
- Check if you will be able to withstand additional Pre EMI along with your expenses.
- The purpose of buying property Investment or usage.
- Find out potential returns from the property.
- Calculate the opportunity cost of money that you can save by Pre EMI.
- A tax benefit does not apply to the interest amount at the starting stage.
- In case of delay in the property construction, you have to pay additional Pre EMI.
Conclusion
You have to consider multiple factors such as your financial condition, builder reputation, market condition, the purpose of buying property, etc. before opting for Pre EMI option in the home loan.