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EMI or Pre EMI: Which is better for Repayment?


Planning to buy a home? It is one of the most expensive purchases in your life time, so you may need the funding for it. Taking a home loan is the most common option nowadays to buy a home. But Have you a gone through the terms like EMI and Pre EMI? Most of the home buyers are facing the problem to take a loan for a house and unsure about the repayment schedule. To get the solution for this problem you can refer What you can do if unable to pay home loan EMIs.

Most of the home buyer heard about the EMI, not aware of the pre EMI and the benefits involved in the pre EMI. In this blog we will look into more details.

What is EMI?

EMI (Equated Monthly Installment) is the amount which we need to repay for a loan taken in a specific time frame (Monthly) with interest. It is calculated based on the interest rates, total loan amount and the tenure of the repayment for the entire loan. This will be decided by the bank once your loan application is got approved.  The interest rate can be fixed or floating depending on your choice. Both the options have their plus and minus. There is another term pre-EMI that is very less known to the people.

What is Pre EMI or PEMI?

A pre EMI is the amount of interest on the disbursed money from bank to the builder. Sometimes the whole money for the house is not disbursed to the builders. You will have the option to tell the bank to not disburse the entire amount before completion of the project, and tell them to partially disburse the money. These are the agreements between bank and builders based on bank’s decision. The real loan repayment will start only when the entire loan amount is disbursed to the builders. While the bank is doing the partial disbursement, you will have to pay the pre-EMI that is only the interest accrued on the partial disbursed money.

Which is a better option – EMI or Pre-EMIs?

The choice of full EMI repayment is deemed as advantageous in the longer run as borrower of the loan starts paying the principal amount from day one itself. But in case, project completion gets delayed, loan borrower may end up paying more than the principal loan amount even before getting possession of the property. However, Pre-EMI turns out to be a better loan repayment mode in case the home buyer wishes to sell the property soon after getting the possession.

There is no difference in the tax treatment under both the schemes and you will not be able to get benefit from any kind of tax deduction until the project is completed.  When the construction is complete one can claim the total pre EMI interest paid in subsequent years in five equal installments as deduction for tax saving. The Pre EMI is the amount of interest on the disbursed money but not the principal which you may have paid during the construction period.

Bearing in mind all the above points, opting for full EMI payment can be more advantageous in the long run as one starts repaying the principal amount from the first day itself. If the project is delayed for a long time, the borrower may actually end up repaying more than the principal amount even before getting the possession of the property. Also under the pre-EMI plan, the borrower could invest the money saved and use the returns to prepay a part of the loan. If one plans to sell the house immediately after receiving the keys, then the pre-EMI option may be better than paying full EMIs.



Category : Flatons Advisors Blog



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