One of the most important ideas you’ll learn when applying for a home loan is pre-EMI. It is essential to comprehend Pre EMI and its operation if you wish to make an informed decision about the repayment schedule for your home loan. We’ll go over the fundamentals of What is pre EMI in home loan, and when it might be useful in this post.
What is Pre EMI in home loan?
Pre-EMI, or pre-equated monthly installment, is a unique loan repayment option offered by financial institutions. Pre-EMIs, as opposed to traditional EMIs, only take into account the interest that has accrued on the amount of the loan that has been disbursed. During the construction of your home or apartment, you will be able to make pre-EMI payments. A pre-EMI is a smaller payment that only covers the interest portion of the home loan.
Notably, pre-EMIs are not factored in when determining how long a home loan will last. Your lender will request payment of the whole amount due each month once the construction of your home is complete. Pre-EMIs are designed to ease your financial strain while your asset is being developed.
To better understand and plan their pre-EMI payments, borrowers can utilize an EMI calculator. An EMI calculator is a helpful tool that helps borrowers estimate their monthly instalment payments based on loan amount, interest rate, and tenure. After entering these parameters into the calculator, borrowers can get an accurate estimate of their pre-EMI and regular EMI payments. They will be able to plan out their loan repayment strategy and make sound financial decisions as a result.
Difference between Full EMI and Pre-EMI
- Loan disbursal: Pre-EMI is applicable during the disbursal phase, whereas full EMI begins to accrue after the entire loan amount has been paid out.
- Interest: Full EMI includes both the principal and interest components, whereas pre-EMI only covers the interest on the amount disbursed.
- EMI payments: Pre-EMI results in lower monthly payments at first, which progressively rise after the full EMI structure becomes effective after disbursal.
- Repayment period: After the loan is fully disbursed, full EMI begins, leading to a longer repayment period. Pre-EMI reduces the total duration by having borrowers start paying back the principal earlier.
- Principal amount: Borrowers only pay back interest during pre-EMI until the entire loan amount is disbursed. Full EMI, on the other hand, comprises principal and interest repayments.
Calculation of Pre-EMI with an Example
Let us carry over the previous example, in which a borrower is taking out a 20-year loan for Rs 30 lakh, with an interest rate of 8%. However, let us assume that the borrower is applying for a loan for a property that is currently under construction and scheduled for completion in three years. Not to mention that the borrower selected a Pre-EMI loan. The bank will only release a portion of the funds over the course of the three years due to the ongoing construction of the property.
Assume that the borrower receives Rs 3 lacs from the bank at the beginning of the loan. Only this Rs 3 lacs, or Rs 2,000 per month (Rs 3,00,000 * 8% / 12 months), is paid in interest by the borrower. After six months, the bank gives the builder an additional Rs 3 lacs. Consequently, pre-EMI of Rs 4,000 is required for a total of Rs 6 lacs. The Pre-EMI amount rises in proportion to the total amount paid out thus far.
| Disbursement Timeline | Amount disbursed (Rs ) | Total amount Disbursed (Rs ) | Pre-EMI (Rs ) | Regular EMI (Rs )(Starts after 36 months) |
| Initial | 3,00,000 | 3,00,000 | 2,000 | 25,093 |
| 6 Months | 3,00,000 | 6,00,000 | 4,000 | 25,093 |
| 12 Months | 3,00,000 | 9,00,000 | 6,000 | 25,093 |
| 18 Months | 3,00,000 | 12,00,000 | 8,000 | 25,093 |
| 24 Months | 4,00,000 | 16,00,000 | 10,667 | 25,093 |
| 30 Months | 5,00,000 | 21,00,000 | 14,000 | 25,093 |
| 36 Months | 9,00,000 | 30,00,000 | 25,093 | 25,093 |
| Total Payments made by the borrower in 36 Months | 2,68,000* | 9,03,348* | ||
He does, however, contribute Rs 9,03,348 to the regular loan repayment, which is included in the loan’s 20-year term. In contrast, the Rs 2,68,000 he paid toward Pre-EMI is not included in the loan’s 20-year term and has no bearing whatsoever on the monthly payment, which is due after the Pre-EMI period ends and includes principal and interest. Consequently, in the aforementioned example, the total effective tenure of the loan is twenty years of full-EMI period and three years of pre-EMI period, for a total of twenty-three years.
Pre-EMI is less expensive than Full-EMI because it only includes the interest amount rather than the principal. However, the initial loan tenor does not include the Pre-EMI duration. The pre-EMI period lasts longer than the actual term of the loan. As a result, the borrower will pay more interest than he otherwise would have.
Conclusion
What is pre EMI in home loan, comprehension For under-construction properties in particular, pre-EMI is essential for making well-informed decisions about home loans. By just paying interest at first, it lowers starting payments while lengthening the loan’s total term. Pre-EMI can lessen the financial burden of construction, but borrowers need to consider how it will affect interest payments in the long run.
FAQ’S of What is pre EMI in home loan
Q1. Is pre-EMI required?
A. No, it is not required to use the pre-EMI option. Borrowers may only choose this alternative if their home loan is for a property that is still under construction.
Q2. Is pre-EMI payment a wise move?
A. Indeed. There is one main advantage to the pre-EMI option. Pre-EMI options are generally less expensive than full EMI options because the latter require you to pay back the entire loan amount regardless of when it is disbursed. Borrowers only need to make interest-only loan payments in the case of pre-EMIs. Additionally, because pre-EMIs will also result in a partial disbursement, the funds are easier to manage.
Q3. Can we convert the pre-EMI to the full EMI?
A. Yes, you have the option to switch to full EMI after your pre-EMI period ends. You can start making full principal and interest repayments for your EMI payments as soon as you receive your house and the loan amount is disbursed. Pre-EMI payments can usually be made over a three-year period, during which time your home’s construction must be finished.