HOME LOAN Pre- EMI: A Comprehensive Guide

Buying a home is a significant financial decision for any individual or family. For many first-time home buyers, obtaining a home loan is the only way to make their dream of home ownership a reality.

To ensure that you make the right financial decision, it is essential to know the options available for structuring your EMI repayments, such as Pre-EMI and full EMI. Pre-EMI is a feature offered by some lenders that allow borrowers to pay only the interest portion of the loan for a certain period, typically the first few years of the loan. This can make the initial payments more manageable, but it’s important to keep in mind that the total interest paid will be higher over the life of the loan. It’s essential to carefully weigh the pros and cons of Pre-EMI and full EMI options before deciding.

Difference Between Pre-EMI and Full EMI Home Loan Repayment Schemes

A full EMI repayment on a home loan includes both the principal and interest portions of the loan. This type of repayment typically begins once the home’s construction is completed. although, some banks may also allow full EMI payments to begin during the disbursement of the loan in stages.

If you have chosen the pre-EMI payment option, you will begin paying the full EMI once the pre-EMI period ends. The benefit of paying full EMI is that it reduces the outstanding loan amount and repays the interest during the loan period. It’s essential to understand the difference between pre-EMI and full EMI and choose the option that aligns with your financial goals and plans.

Home Loan Pre EMI

‘Pre-EMI’ refers to the interest paid on a home loan before the actual EMI (equated monthly instalment) payments start. Some lenders offer a feature that allows borrowers to pay only the interest portion of their loan for a certain period, typically the first few years of the loan. This can make the initial payments more manageable for borrowers, as the principal amount is not yet due.

However, it is important to note that the total interest paid will be higher over the life of the loan, as the interest is not being applied to reduce the principal balance during the pre-EMI period. It is vital to carefully consider the terms and conditions of a pre-EMI loan before signing on and to make sure it aligns with your overall financial goals and plans.

Benefits of Choosing Home Loan Pre-EMI

Reduced Financial Burden: Opting for Pre-EMI payments allows individuals to pay less each month, which can help ease their financial burden.
Flexibility: Pre-EMI payments provide more flexibility for individuals who may be facing temporary financial difficulties or are waiting for an increase in income.
Interest Savings: Paying pre-EMIs can help individuals save on interest payments as they only pay interest on the amount disbursed and not the entire loan amount.
Improved Credit Score: Consistently making pre-EMI payments on time can help improve an individual’s credit score, which can make it easier for them to obtain future loans.
Peace of Mind: The ability to pay lower EMIs can give peace of mind and a sense of security to individuals struggling to meet their financial obligations.
Builds equity: Pre-EMI payments can help build equity on property that is being financed, which can be beneficial in case of resale or refinancing.

Pre-EMI is Ideal for:

Choosing the pre-EMI repayment option can benefit those who want to save money during the initial period of the loan and invest it in a way that generates good returns. The opportunity cost of the money that would have been used for full EMI payments can be compared to the potential returns from investing that money elsewhere. For example, if the full EMI payment is Rs. 25,000, with an interest contribution of Rs. 5,000, by choosing to pay only the pre-EMI, i.e., Rs. 5000 in interest, the borrower can invest the remaining Rs. 20,000 in a savings scheme or other investment with the potential to earn consistent returns. These returns can then be used to pay the EMI later.
The pre-EMI repayment option can benefit property investors who plan to sell the property once construction is completed. Investors can minimize the money paid towards the loan during the construction phase by choosing the pre-EMI option, leaving more funds available for other investments or expenses. Additionally, by paying only the interest portion of the loan during the pre-EMI period, investors may have more flexibility in timing the property sale, as they will not yet be committed to making full EMI payments.
For individuals who anticipate an increase in their income or are currently unable to fully pay their EMIs, opting for pre-EMI payments may be the most suitable choice.

When to Use the Pre-EMI Option?

You may choose this option if you have limited cash flow and cannot make the EMI payments.
This strategy can be used if you urgently need credit and want to save money for it.
Choosing pre-EMIs can save you money; the difference can be invested to earn greater profits.
When it comes to house loans, if you plan on selling the property soon after construction or within a few years, you may opt to pay Pre-EMIs to the lender.

Elements to Evaluate Before Determining the Pre-EMI Option

Choosing the Pre-EMI option allows the borrower to repay the loan’s interest amount without impacting the loan term or amount. However, it should be used with caution. Before utilizing this option, it’s important to consider the potential risks, such as incurring bad debt or additional costs.

Assess the amount of money you have available for loan repayment.
Evaluate the purpose of the property being acquired through the loan.
Evaluate if there will be any returns on the property being purchased.
Determine if you will be able to make EMI payments as well as any other unexpected or planned expenses.
In the case of a house loan, consider if the property will be for personal use or if it will be sold after construction.
Compare different investment options to see if you can achieve greater returns.
Assess the total opportunity cost of the money you plan to save.

Tax Benefits of Pre-EMI Options

The Pre-EMI option does not offer any tax advantages, and the buyer does not receive any tax deductions until the project is completed. Once the project is completed, the tax benefits for principal repayment under Section 80C are limited to Rs 1.5 lakh per financial year, and interest payment is limited to Rs 2 lakh under Section 24 for a self-occupied house.

The tax benefits can only be taken after possession of the house is received. If the buyer pays EMIs from the beginning, the interest paid during the under-construction stage can be claimed over five years. The deductions made on pre-EMI can be claimed under Section 24 of the Income Tax Act.

Risks Involved in the Pre-EMI Options

Not all lenders allow borrowers to pre-pay their loans while paying a Pre-EMI partially.
The main risks associated with a Pre-EMI system include delays in construction and stalled projects. Delays in possession can lead to the borrower being forced to pay a Pre-EMI. Some lenders may enroll consumers in the Pre-EMI option without proper verification, which can be extremely risky.
Repayment of the loan begins only after you have possession of the property. Any payments made before possession do not lower the principal or reduce the loan term. For example, if you chose a 20-year loan term and paid Pre-EMI for five years, you will still be required to pay for 25 years. Some lenders may include the 5-year Pre-EMI term in the 20 years, resulting in an increased EMI cost over 15 years.
Paying the lender interest-only does not provide tax benefits, and some do not provide interest certificates.

Bottomline

When buying a new home, most buyers finance it with a home loan. It is crucial to select a lender that offers a low-interest rate. The decision to choose a pre-EMI plan is a strategic one that requires consideration of factors such as current market conditions, income, expenses, and the property’s potential resale value. By fully understanding the pre-EMI option, buyers can make an informed decision about how to repay their home loan when purchasing their new home.

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