Welcome to our blog Where we unlock the knowledge of real estate and finance rather than locking it Let’s say you want to invest in an under-construction property and you want to borrow a home loan for it Then generally, the banks give you 2 options Pre EMI and Full EMI options What is the Pre EMI option and how it is different from the Full EMI option?
And should you opt for Pre EMI option or not and if yes, then in which cases We’re going to discuss all these points in detail in this video So stay tuned with this video till the end As always, let’s switch to the blackboard To understand the Pre EMI, let’s take an example Let’s say this is an under-construction property in which you’ve invested and let’s say the time period of construction is 12 months Generally, it is 2-3 years but in our example, we’ve assumed 12 months for a better understanding So in this, let’s say you took a loan of Rs 36 lakhs for buying this property.
The total cost of the property is Rs 45 lakhs Pre EMI option is only available in the case of under-construction property and not in the case of ready to mover property So let me write it down here Now let’s get back to our example So you borrowed a loan of Rs 36 lakhs at an interest rate of 8.5% per annum And let’s take the tenure of 20 years So now you have 2 options. 1.
To pay the Full EMI If you will pay the Full EMI the EMI becomes Rs 31,242 For this, I made an EMI calculator and I also made a video on it You can watch that video and you can download that EMI calculator as well So if you will check out my EMI calculator, you can easily find out this EMI which is Rs 31,242 With that, the total interest payable after 20 years comes out to around Rs 39 lakhs You can also calculate this very easily with the EMI calculator So if you choose the option of Full EMI Then you will start paying Rs 31,242 right from the day 1 But in the Pre EMI option If I assume the Pre EMI interest rate, it is around 0.71% So for 0.71%, I divided 8.5 by 12 So let me write here 8.5%/12 = 0.71% Now let’s see how the payment is done in the Pre EMI option to the builder and how the Pre EMI starts So I made this Amortization schedule.
Let’s say the construction period is 12 months and you pay Rs 3 lakhs every month Let’s say you have to pay Rs 36 lakhs to the builder Out of 45 lakhs, let’s say you did a downpayment Downpayment of Rs 9 lakhs So we assumed that you did a downpayment of Rs 9 lakhs through your own sources And after that, you took a loan of Rs 36 lakhs and now slowly the payment will go off Let’s say it’s Rs 3 lakhs per month Rs 3 lakhs per month are going, right! I’ve written the total disbursement in this column So Rs 3 lakhs in the first month, Rs 6 lakhs till the 2nd month Rs 9 till the 3rd month, 12, 15, and so on..
So this is the total disbursement So in the pre-EMI option, you only pay the interest And interest is also the Simple interest Simple interest only. Let me write here. So if Rs 3 lakhs are gone in the first month then simple interest will be calculated on Rs 3 lakhs That will be 0.71% Rs 2125 for Rs 3 lakhs After that on Rs 6 lakhs, it is Rs 4250 In this way, the pre-EMI of Rs 25,500 will start going on Rs 36 lakhs So this is your pre EMI till the last.
So this was your 1st pre-EMI, this one was the 2nd, 3rd and in this way, this is your 12th pre-EMI So if you will calculate the amount of the total pre-EMI then the final amount will be Rs 1,65,750 So how much total interest do we pay in pre-EMI in one year Rs 1,65,750 Now if we have to find the total interest payable for 21 years Then it will be the full EMI which you have to pay for 20 years + this So how much will be the total amount? Rs 40,63,743. Right! So this is 1 + 2 So in the case of pre-EMI, you’ll pay more interest rate Let me explain graphically In the case of pre-EMI the time till when the construction is going on. Let’s say this is the 1st year This is the 0 date, alright! This date is after 1 year and in between, you paid pre-EMI After that, the countdown for 20 years will start again Here you have to pay the full EMI.
This was the case of pre EMI but If you would have paid the EMI directly Then from day 0 till 20 years which would have ended here You would have to pay the full EMI So your loan amount would have ended in 20 years but in this case, it will go till 21 years So 20 years are these and 1 years from here. So that’s why you’ll do the repayment till 21 years So 1-year pre-EMI interest rate is additional That’s why you are paying an additional interest rate So let’s see what are the advantages of pre-EMI and in which case you should opt for it and what are the benefits of EMI.
So if you want to choose the pre-EMI then in which case should you choose If you don’t have money in the initial years Let’s say you are living on rent and you are paying a rent of Rs 20,000 per month In the first case, if you will calculate the average of pre-EMI then you might have seen that you were paying Rs 2500 in the starting So 2500 + the outflow of Rs 22,500 Gradually, the pre-EMI will keep on increasing and it will become Rs 45000 finally when you’ll pay the last. We saw 25000, right! So the final pre-EMI was around Rs 25,500 and the total outflow will be around Rs 40,000-45,000 But if you would have opted for the full EMI, you would have to pay Rs 20,000 + Rs 31,000 EMI from day 1 And the outflow would have been Rs 51,000 in case of full EMI.
So if you opt for pre-EMI then the outflow will be less If you have a limited budget and you live on rent then pre EMI option will be better for you And when you will move in, the rent will get completed and the full EMI will start Another reason is, if you’ve invested in an under-construction property Then maybe you want to sell it till possession In that case also, the pre-EMI option makes sense because you don’t want to lock your money and it is just for the investment purposes.
So you can definitely go with the pre-EMI option After that, the difference between EMI and pre EMI As we saw earlier, if you are paying an EMI of Rs 31,242 every month Let’s say you’re paying an EMI of Rs 31,242 for 12 months So how much is your total amount? Rs 3,74,904. Right! But if you pay pre-EMI, in that case, the total was around Rs 1,65,000 Rs 1,65,750. Alright! Now the difference is around Rs 2 lakhs If you can invest these Rs 2 lakhs And let’s say if you can invest it at more than 8.5% So if you can earn more than the interest of the home loan (8.5%) through any investment.
Then you should invest this money there And you can choose pre EMI in that case as well But for most of the people, this becomes a headache and the salaried class people don’t have this much time So definitely, if you can afford the EMI option then you should go with it After that, if you need extra cash immediately for any medical emergency or if you want to buy any vehicle or any other requirement then the home loan is cheaper and you can choose pre EMI option for that as well After that, when should you choose the option of full EMI? If you can afford it then definitely you should choose the option of full EMI because you want to repay your loan as soon as possible.
Because it is not possible for everyone to be investment savvy and to get more returns than the interest rate because You’ll always get the rate of FD less than the home loan interest rate So if the construction is delayed Let’s say instead of 2 years, it’s 3-3.5 years so the interest amount will keep getting accumulated and the interest will increase In that case, it is better to start with full EMI as soon as possible And as I said earlier, if you cannot get more returns and if you get less than 8.5% returns in any other investment Then it’s better to pay the full EMI and repay the home loan as soon as possible.
Now let’s see the tax benefits in EMI and pre EMI Actually, the tax benefits of both are similar You get tax benefits on a home loan under Sec 80C Under Sec 80C, there’s a benefit of Rs 1.5 lakhs as of FY 2017-18 You get up to Rs 1.5 lakhs deduction but But this benefit is not available in the construction period of EMI or pre EMI So the benefit of the principal repayment starts after the possession Whether in the case of EMI or in case of pre-EMI After that, in section 24, you get benefit on the interest paid .
And how much is that? Rs 2 lakhs per annum. Let me write it here Loss from property So due to the loss because of interest every year In that, you can claim an interest deduction of Rs 2 lakhs per annum under loss from property And how can you do this? The interest portion accumulated during construction Can be claimed in 5 equal instalments for the next 5 years after possession.
Note the word possession here So after possession, you can claim Rs 2 lakh benefit every year for 5 years So it is applicable in the case of EMI and pre EMI So the tax benefits in both the cases are similar So I think I covered all the major points on pre-EMI What exactly pre-EMI is and in which case should you opt for pre-EMI and in which case should you choose the full EMI I hope you liked this artical. Please like and share it.
