Planning to purchase an under-construction or partially completed project? But, facing the common dilemma of which home loan repayment plan makes more sense – Pre-EMI or EMI?
There are predominantly two options to choose from, one can either opt to pay full equated monthly installments (EMI) or Pre-EMIs. Read on to find out which is a better option for you.
What is EMI?
EMI is the term used for Equated Monthly Installment. EMI is the monthly amount payments that a borrower make towards a loan he/she opted for. It includes both interest and principal component.
What is Pre-EMI?
Under the Pre-EMI option, the borrower is required to pay only simple interest on the principal amount that will be disbursed according to the stage of construction of a project. The actual EMI payment will commence after the possession of a house.
Now, whether you should go for the Pre-EMI option or the EMI ones depend on many factors. If the time taken for completion of construction of a home is four years, then it means that the buyer would have to pay only the interest amount for four years, which is comparatively less than paying the full EMI. However, it is not what it looks like at first glance.
These are two important factors that every individual should consider at the time of selecting payment option:
-Time to repay loan
-Calculation of EMIs
Time to repay loan
Under the Pre-EMI payment scheme, the time taken to complete the home and to get possession holds importance. For example: If the developer takes 5 yrs. to hand over the apartment and the loan tenure is 15 yrs., then buyer would have to pay for 20 yrs. in total. If the project gets delayed, then time to repay loan would be prolonged as well.
How EMIs are calculated
Under Equated Monthly Installment (EMI) scheme, payouts are computed on the principle amount. In the Pre-EMI option, the loan payouts are calculated only on the basis real loan disbursement. For example: If the borrower has applied for the loan amount of Rs. 15 lakhs but the bank has disbursed only 5 lakhs. In this case, the borrower needs to pay interest on Rs. 5 lakhs only. The real loan repayment will start only when the complete loan amount i.e. Rs. 15 lakhs is disbursed.
So which is the better option- Pre-EMI or EMI?
Analyzing all the above observations, opting full EMI is better option in the long run as one starts repaying the principal amount from day one and becomes habitual of EMI by adjusting earnings and savings to pay EMI. However, it may not necessarily be the better option in the following cases:
– If the possession of project is delayed for a long duration, the borrower may actually end up repaying larger principal amount, even before getting the possession of the property.
– Pre-EMI option is the best option for investors who wish to sell their property immediately after the possession.