Equated Monthly Instalment or EMI is a repayment option on a home loan in which both interest and principal amounts are paid to the lender through a fixed monthly payment. These days, lenders also offer another method for the repayment of the home loan, which is known as the pre-EMI plan.
Pre-EMI option, as experts say, is usually offered on home loan offered for under-construction properties wherein the loan amount is usually disbursed in a staggered manner basis the progress of the home construction.
The borrowers opting for the pre-EMI interest option are required to just service the interest component until the disbursal of the entire loan amount.
The regular EMIs begin after the building is complete.
According to Ratan Chaudhary—Head of Home Loans, Paisabazaar, pre-EMI option helps in easing the cash flow constraints of those who have to incur rental expenditures as well as repay their home loan EMIs till the completion of their home construction or the possession of their new property.
"With Pre-EMI, borrowers are not repaying anything towards the principal home loan amount. It is just a reduced payment that gives them time to build finances before the full EMIs start. If the borrowers are living in a rented house while the apartment is getting constructed, they can choose the pre-EMI option to reduce the burden of paying hefty EMIs along with paying the rent,” opines Anuj Kacker, Co-founder, MoneyTap.
Both pre-EMI and full EMI repayment methods for home loans enjoy the same tax benefits. The tax deduction is not applicable during the under-construction phase. However, once the borrower obtains the possession certificate, the amount paid as interest (in pre-EMI or full EMI option) will be aggregated and is considered for a tax deduction in 5 equal installments.
The flip side of availing the pre-EMI interest, according to Chaudhary, is the higher interest cost incurred than the regular home loan EMI option.
"For such users, another variant of the pre-EMI repayment option is available, wherein the borrowers have to serve both the interest and principal components of the disbursed loan amount," he explains.
Under this option, the EMI would keep increasing as and when the loan is disbursed in a staggered manner till the final tranche of the loan disbursal. Repayment of the principal component of the loan disbursed leads to lower interest cost than the usual pre-EMI interest option.
First Published: IST