What to Choose Pre EMI Vs Full EMI in Home Loan?

23 NOVEMBER, 2022

Property prices have been skyrocketing in recent times. Purchasing a house outright is very difficult today. The only way to finance your home is through home loans. Selecting a loan provider with minimal home loan interest rates is essential.

Repayment of home loans can be made in multiple ways, but you should be wise enough to choose between pre- and full EMI options. Proper knowledge in this area will be helpful in the management of your financial resources while your home is constructed. Read on to learn more about full EMI and pre EMI meanings.

What Is Pre-EMI?

Pre-EMI is the monthly payment of the interest amount applicable on the home loan. The payments are made when your house is under construction. As the principal amount is not considered for payment, the pre-EMI payment is lesser than the full EMI payment. The pre-EMI period ends once your house is constructed and is not included in the home loan tenure. This repayment method is majorly designed for individuals with limited finance.  

Consider the following example for a better understanding:

An individual borrows a home loan of INR 20, 00,000 with a loan repayment tenure of 15 years. It will take three years to complete the construction of his property. He opts for the pre-EMI repayment option during this period. His pre-EMI repayment phase will end after these three years, and the EMI payment period will start. Therefore, the overall loan repayment period would be three years (pre-EMI phase) + 15 years (loan repayment period)=18 years.

What Is Full EMI?

Full EMI payments include both principal and interest amounts. These payments start after your house is fully constructed. Some financial organizations allow the commencement of full EMI payment even when the home loan is still under disbursement. Under this option, the outstanding loan amount and interest are paid during the loan tenure.  

Pre EMI vs Full EMI: Understand the Differences

1. Loan Disbursement: The entire loan amount is disbursed under the full-EMI option. Whereas, under the pre-EMI option, the loan disbursement occurs in parts.

2. Loan Repayment Period: As the full-EMI payment includes the principal component of the loan amount, the loan repayment is sooner when compared to the pre-EMI home loan.

3. Calculation of Interest Rates: The pre-EMI interest is calculated depending on the amount of loan disbursed. On the other hand, the full-EMI interest calculation depends on the principal loan amount.

4. Impact on Principal Amount: The principal loan amount and the loan tenure decrease with each monthly EMI payment under the full-EMI option. There is no impact on the loan tenure, principal loan amount or interest rate under the pre-EMI option.

5. Commencement of EMI Payments: Pre-EMI payments start when the house is under construction. On the other hand, under the full-EMI option, monthly EMI payments begin only after the construction of the house is completed.

6. Impact on Financial Resources: As only the interest amount is paid in the pre-construction stage under the pre-EMI home loan, it is easier to manage your financial resources. Whereas you might find it challenging to repay the loan amount under the full-EMI option.

7. Right to Sell the Property: It is possible to sell the property as soon as the construction is completed or after a few years of its construction under the pre-EMI option. You cannot sell the property for a fixed period under the full-EMI option.

Tax Benefits

There are equal tax benefits for pre- and full-EMI home loan repayment methods. You cannot claim a tax deduction during the construction period of the property. However, after possession of the property, interest payments (under the pre-EMI or full EMI method) will be totaled and is applicable for a tax deduction in 5 uniform installments. You can claim these installments as a deduction under Section 24 in the succeeding five fiscal years. 

Under Section 80C, the tax benefit for the repayment of the principal amount is limited to INR 1.5 lakhs per fiscal year. The tax benefit for payment of the interest amount under Section 24 is limited to INR 2 Lakhs in the case of a self-occupied residential property. However, there is no limit for a property let out on rent or lease.

Regarding tax benefits, there is no significant difference between the pre-EMI and full-EMI methods. Therefore, the tax benefit is not essential when selecting the two methods. 

Opt for the Full-EMI Option under the Following Scenarios

Here is a list of conditions wherein it is suitable to select the Full-EMI loan repayment option:

• When the purchased property is going to be a long-term investment.
• When you plan to repay the loan in good time.
• If you wish to claim tax benefits right after the commencement of the repayment period.
• When a delay is anticipated in the construction of the property.
• When you don’t have a more suitable option to invest the funds. 

Opt for the Pre-EMI Option under the Following Scenarios

Here is a list of scenarios wherein it is beneficial to choose the Pre-EMI loan repayment option:

• When you have limited financial resources to pay rent and the EMI payment.
• If you plan to sell the property within a few years of its construction.
• If you wish to sell the property as soon as the house is constructed.
• When there is a shortage of funds, and you urgently need a loan.
• When you wish to earn better returns by further investing the difference amount between Full-EMI and Pre-EMI options.

Conclusion

Now that you’ve learnt about pre-EMI and full-EMI loan repayment options use a home loan EMI calculator to determine the required funds. It will help you to make an informed decision. Altogether, if you wish to repay the loan soon, then full EMI is a better option as the principal amount is paid from the start.