Pre-EMI vs Full EMI: Which one to go for?
The dilemma
The most common dilemma a potential home buyer faces while planning to invest in an under construction or partially completed project is that of which home loan repayment schedule to go for.
There are predominantly two options to choose from, one can either opt to pay full, equated monthly installments (EMI) or pre-EMIs. In the first option, the amount one pays each month will be calculated on the basis of the total loan amount. In the second option, one would have to pay only the interest on the loan that will be disbursed at each stage of construction and the real EMI payment will commence only after he gets possession of the home.
A first look at both paints the picture that the latter option, i.e. paying pre-EMIs is better than the first. If the time taken for completion of construction of a home is three years then it means that the buyer would have to pay only the interest amount for three years, which would invariably be a lot less than paying the full EMI.
However, there is more to it than it looks at the first glance. The two things that are to be taken into account to choose the option are – the tenure and the calculation of EMIs.
Tenure
Under the pre-EMI payment the time taken to complete the home and to get possession holds importance. Assuming that the developer takes three years to hand over the house on an average, and the loan tenure is 20 years, then the buyer would have to pay for 23 years in total. If the project gets delayed, then the tenure would be prolonged as well.
On the other hand, as the complete EMIs are paid, the payout will be for a lesser duration as the decrease in the principal component will translate into shorter loan tenure.
Calculate EMI
The next important component is to know how to calculate EMIs. Under the full EMI scheme, the payouts are computed on the total loan amount.
In the pre-EMI option, the loan payouts are calculated only on the basis of the actual loan disbursement. For example, if the buyer applies for a loan amount of 10 lakh and 3 lakh are disbursed at first, then one has to pay the interest on 3 lakh only. The real loan repayment starts only when the entire loan amount, that is Rs 10 lakh, is disbursed.
Tax benefit
Regarding tax benefits, there is no difference in the tax treatment under both the schemes and one will not be entitled to any benefit in the form of any kind of tax deduction until the project is completed.
So which is the better option?
Considering all the above points, opting for full EMI payment can be more beneficial in the long run as one starts repaying the principal amount from the first day itself.
However, it may not necessarily be the better option in uncertain conditions. If the project is delayed for a long time, the borrower may actually end up repaying more than the principal amount even before getting the possession of the property. Also under the pre-EMI plan, the borrower could invest the money saved and use the returns to prepay a part of the loan.
From an investor’s point of view, if one plans to sell the house immediately after receiving the keys, then the pre-EMI option may be better than paying full EMIs.
