Pre-EMI Calculation for CLP Based Under Construction Properties

Pre-EMI Calculation for CLP Based Under Construction Properties

pre-emi-calculationsMost of the housing loan disbursed in India for the purchase of new house or flat are under construction linked plans for the under construction properties. In these cases, the lenders facilitate partial disbursement of the sanctioned loan, as and when demanded by the developer based upon the level of construction.

The actual EMI payment in these cases starts only after the disbursement of the full amount. That doesn’t mean that the calculation of the applicable interest amount is also delayed. The interest starts to get accumulated from the very day the first installment is disbursed to you. And so you are required to start making payments to the bank from the first day itself.

Many of the housing finance companies and banks have now started giving options to the borrower to either pay only the applicable interest amount in this period or even start regular EMI from the very beginning. The first option, in which you choose to pay the applicable interest amount during the construction phase is called pre-EMI. The second option is also called Full EMI or Tranche-based EMI and is already discussed in our post Tranche EMI – Reduce Effective EMI with Tranche Based EMI Repayment Plan.

How Pre-EMI is Different from Regular Full EMI

In the case of regular full EMI, the interest is calculated based on the total sanctioned amount of loan. You start making the payment on the interest is calculated on the full amount right from the first day. This full EMI includes both interest and principal repayment component, and your total loan duration gets reduced by a period for which you are paying the emis (i.e. The period by which your property is ready).

On the other hand, in the pre-EMI option, the payouts are calculated only on the basis of the actual loan disbursement. For instance, if you are sanctioned a housing loan of Rs. 30 lakhs and the bank disburses it in five six-monthly instalments (making the total construction phase of 30 months), then the accumulated interest for the first six months will be for Rs. 6 lakh, for the next six months will be for Rs. 12 lakh and so on. All these calculated accumulated interest amounts will be added up and divided by 30 months, to arrive at the monthly installment of the pre-EMI to be paid by you.

Which is Better – Full-EMI or Pre-EMI

On the face of it, it might look that we EMI is a better option because here you are paying only the interest component and that too applicable on the disbursed to loan amount. But the actual calculations may show that it is more expensive to opt for the pre-EMI option – and let me warn you that the difference is huge.

Let us take a simplified hypothetical case to illustrate the difference.

  • Loan amount = Rs. 20 lakhs
  • Loan period = 20 years
  • Annualised interest rate = 10%
  • Construction period = two years
  • Loan disbursement = five equal six-monthly instalments, with 20% amount paid in the beginning.

In this simplified hypothetical case, you will find that the pre-EMI option requires you to pay about Rs. 28 lakh while the full EMI option needs only Rs. 16 lakhs. This is a huge saving and take the balance in favour of full EMI.

When Borrowers Might Resort to Pre-EMI

Every coin has two faces. Similarly pre-EMI has its own advantages also, and based upon them it is suitable for a certain section of borrowers.

The biggest advantage of opting to pre-EMI option is that it allows you to qualify for higher loan amounts. Since in the beginning your payment requirement is less, you may see larger loan amounts, in case you expect your income levels to rise in near future so that you are in a position to sustain the higher amounts of regular EMI.

Pre-EMI option can also be advantageous to you in case, you have the opportunity to earn better interest by investing in high yielding investments and generate better returns.

Tax Treatment of Pre-EMI and Full EMI Option

As per the exist in income tax rules, you are not allowed to claim any tax benefits during the construction phase. The interest paid on the home loans during the construction phase keep on getting accumulated, and you can claim income tax rebate on this accumulated amount in five years subsequent to the completion of construction.

It is to be noted here that is interest deduction for self occupied property is limited to only Rs. 1,50,000. Looking at the current big size of the home loans, it is often seen that this limit of Rs. 1.5 lakh get easily exhausted and in both the cases of pre-EMI as well as full EMI, we will not be any difference in the five-year period after the construction period is over.

As it can safely be said that if you can afford the payment for EMI right from the beginning, then you will be saving a lot of money if you go for full EMI option. Go for the pre-EMI option only when you want to qualify for larger amount of loan and you are not in a position to afford the resultant larger EMI in the beginning.

 

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Disclaimer

Lots of approximations and assumptions have been made while developing the calculators.

Please make your own calculations before making any financial decision.