Should you opt for pre-EMI for a loan on a property under construction?

Pre-EMI is naturally lighter on the pocket as the borrower is only paying the interest on the disbursed (and not full) amount.

When you go for a loan on a property under construction, there is usually an option for paying pre-EMIs. Since the loan disbursal is construction-linked, your actual loan outstanding increases gradually. The pre-EMI option allows the borrower to only pay monthly interest on the actual disbursed loan amount (and not the full loan amount). This interest paid is called the pre-EMI. As construction progresses and more and more loan amounts are disbursed, the pre-EMI also keeps on increasing.

Pre-EMI vs regular EMI

Let’s take a small example. Suppose you have decided to buy an under-construction property and for that, you need to take a home loan of Rs 75 lakh. Assuming a fixed 8.5 percent rate and a 20-year tenure, your normal EMI will be Rs 65,087 per month. And this includes interest as well as principal (repayment) components. So, with each monthly EMI payment, the outstanding loan amount starts reducing.

Now, if instead of the full-EMI option you go for the pre-EMI one, then your monthly outgo will be much lower. Remember that in the pre-EMI phase, you only pay the interest on the actual disbursed amount and there is also no principal repayment component here.

Say that an amount of Rs 15 lakh of loan (at 8.5 percent) is disbursed to your builder in the first month. Your pre-EMI for this will be only the monthly interest on the disbursed amount, Rs 10,625 per month. This will be your pre-EMI till the time the next tranche is disbursed.

Suppose five or six months down the line, another Rs 15 lakh is disbursed. This pushes up the total outstanding (or disbursed amount) to Rs 30 lakh. The pre-EMI now will be a monthly interest on this Rs 30 lakh, which is Rs 21,250.

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If you have taken the pre-EMI option, then the full EMI (Rs 65,087 in this case) will start only after full disbursal is made. Till then, you only pay interest on the outstanding amount. No principal repayment happens. So, in a way, since the outstanding remains the same, the actual tenure of the home loan will start when the pre-EMI period is over.

But if you begin paying the full EMI from the start itself, even when full disbursement is not made (and the property is still under construction), then you will start repaying the home loan like normal times where each EMI has a part going towards interest servicing and the remaining towards principal repayment.

Essentially, in the full EMI scenario when the house is still not complete, you begin prepaying the loan while your house is under construction.

Which is better: Pre-EMI or full EMI?

Pre-EMI is naturally lighter on the pocket as the borrower is only paying the interest on the disbursed (and not full) amount. This may be very helpful and ease the burden for those who are staying in rented premises themselves and have purchased an under-construction property. So, if one cannot afford the full EMI (along with rent), then it is natural to go for pre-EMI now and the full EMIs later.

But pre-EMI means that in the long term, you will incur a higher interest cost than the regular full EMI option. In the full-EMI scenario, the loan gets repaid faster as well.

So, if one had to choose between the two options, it would depend on a lot of factors. The primary ones being the full EMI servicing capability versus just doing pre-EMIs for the duration of construction.

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If you have limited resources and need to conservatively manage your cashflows during the construction phase, then pre-EMI will be better. But if you have sufficient surpluses and you want to minimise the overall interest cost and reduce the loan tenure, then the full-EMI option is better.

Another angle to consider is that many times, construction, and delivery can be delayed. In that case, the pre-EMI period may continue longer. But in that case, a person who may have started with pre-EMIs, may decide to switch to full EMIs to control the interest outgo.

Both the pre-EMI and full EMI methods have their pros and cons. So before deciding, carefully assess your current and future financial situation.