Your one-stop guide on Home Loan EMI
Home loan EMI
Borrowing to purchase an under-construction property? Is all you know about home loans confined to simply paying an ‘x’ amount every month till the completion of the tenure?
Some of you feel joy when the lender offers the ‘facility’ of starting EMIs only after you receive the possession of the property. You believe this is an opportunity to save money and consider this as a ‘flexibility’ that will allow you to start the repayment only after you enter your new home. Caution! You haven’t noticed whether your repayment mode is a pre-EMI or EMI.
Before accepting any proposal from the lender, understand things first.
In the following paragraphs, we shall help you get the clarity. Let’s begin with the basics –
What is EMI?
Equated Monthly Installment (EMI) is a repayment option where you pay both interest and principal to the lender in a systematic monthly fixed amount. The interest payable throughout the loan tenure gets computed over a chart called amortisation schedule. This plan portions the interest and principal in a descending and ascending order respectively.
What is Pre-EMI?
Pre-EMI is the simple interest payable on the principal drawn for the number of days of usage payable to the lender on a specific day of every month. Upon drawing down further amount, it keeps increasing since the interest payable on the principal increases accordingly. This mode of payment can be applied only in case of under- construction purchases as the loan disbursement takes place in tranches.
What are the benefits of opting for either EMI or Pre-EMI?
Paying the EMI directly, that is, both principal and interest from the beginning, it helps you reduce the outstanding principal as well as the tenure from the very first month. If you do not have spare money to start the EMI immediately, you may start paying the ‘interest-only’ on the partially disbursed amount i.e. Pre-EMI.
Who should opt for Pre-EMI?
If you are not comfortable starting to pay off the loan principal right away owing to constraint of funds, you may opt for Pre-EMI. However, it does not necessarily require you to wait till you get the possession of the property; you can switch to the EMI option at any time.
Who should opt for EMI?
Do you have stand-by cash to start the monthly EMI with the purchase of the loan? Then you can start the repayment right away. In this mode, the loan principal repayment starts simultaneously at the same time reducing the unexpired loan tenure.
Can the repayment mode be switched from Pre-EMI to EMI in the mid-term prior to possession?
It is advisable not to wait till possession to start the EMI. For example, you have drawn down 95% of the loan and the final 5% is payable on possession, but the project is delayed by 6 months, you end up paying Pre-EMI (simple interest) on almost the complete loan amount for the additional 6 months, which is about the same amount as the EMI itself. While the acquisition cost shoots up there is no repayment of the principal or reduction in the tenure either! So, switching to EMI mode after drawing down 70-75% is recommended. Although not all lenders allow that, those who allow, won’t initiate it for you. It is wise here to opt for a professional advice.
What is beneficial for you as the borrower?
The borrower himself has to decide what suits him. Nonetheless, when choosing the Pre-EMI mode, the following risks need to be kept in mind-
Some lenders do not allow the borrower to part-reclose the loan under Pre-EMI stage. They ask you to pay installments to the builder instead for a few tranches & won’t let you reduce the loan amount.
Some lenders give automatic Pre-EMI option without confirmation. This is very risky. In the loan application, there is no provision to opt for it and while loan agreement signing either you forget to check or the lender overlooks it.
You get no tax benefit by paying interest-only to the lender; some don’t even issue the interest certificate. If you are paying the EMI from the beginning, you can claim all the interest paid during the under-construction stage in a spread of 5 years, after taking possession. This cannot be done for payment of Pre-EMI in under-construction stage.
Your repayment starts only upon getting the possession. Hence, whatever sum you have paid so far neither reduced your principal nor tenure. If you had opted for a 20 year loan term 5 years ago and paid Pre-EMI for 5 years, then you pay 5+20 years. Some lenders consider this 5 year Pre-EMI term included in the 20 year and amortise your repayment in 15 years, making the EMI amount higher!
Delay in possession bleeds you bad. Meaning if the loan amount was 1 crore and 95% of that is drawn, you pay interest only on Rs 95 Lakh for all the months of delay without a single rupee repayment, for which the EMI could be lesser than Rs 1 Lakh a month, wherein you pay Rs 95,000/- of Pre-EMI unreasonably.
