25 MAY, 2021

There has been a massive price hike in the real estate sector in recent times. Property rates have increased by an average 38% across seven major cities over the last decade. As a result of this, home loans have become a popular financing option for purchasing properties. The loan amount can be repaid in affordable EMIs over the tenure that suits you the best. As a well-informed borrower, you must also learn about Pre-EMI and Full-EMI, and choose wisely between the two. It will help you manage your financial resources in a much better way.

Read on to know more.

What Is Pre-EMI?
Pre-EMI refers to the monthly instalment that is paid only towards the interest component of the home loan. It is to be noted that with Pre-EMI, you won’t be repaying anything towards the principal amount.

You can opt to pay Pre-EMIs when your house is under construction. Once the construction of the house is completed, you will be required to pay the EMIs in full. Opting for Pre-EMI will reduce the repayment burden of your home loan. However, it is to be noted that the Pre-EMI payments won’t be considered as a part of your loan tenure. The tenure of the loan will be calculated from the time you start paying EMIs in full.

When Is Pre-EMI Ideal?

  • A Pre-EMI can be ideal when you have to pay house rent as well service your home loan.
  • Since the amount in case of Pre-EMI payment is lesser as compared to Full-EMI, you can manage the cash flow better and invest the amount saved to generate short-term revenues or for other purposes or make a higher down payment
  • Opt for a Pre-EMI payment if you wish to sell the property after the completion of its construction.

Here’s an example that will help you understand Pre-EMI in a better way:

Let’s assume you avail a home loan of Rs50 lakh at an interest rate of 8.5% p.a. for a period of 20 years to purchase an under-construction property. The construction will be completed in 2 years, during which you choose to pay pre-EMI. On completion of the property, the Pre-EMI payment ends, and regular EMI repayment period commences. Thus, the total home loan tenure would be 2 years (pre-EMI period) + 20 years (loan tenure) = 22 years.

For a home loan of Rs 50 lakhs, if you opt for a disbursement tranche of 5 lakhs, your Pre-EMI will be Rs. (5 lakhs x 8.5%/12) = Rs. 3,542. In case you take another disbursement of Rs 10 lakhs after 6 months, your EMI will increase to Rs 10,625 (Rs 15 lacs x 8.5% /12). It must be noted that in case of Pre-EMI, the entire amount paid will go towards the interest payment and not the principal repayment.

What Is Full-EMI?
Full-EMI refers to a regular home loan EMI that is paid towards the interest as well as the principal amount of the home loan. If you have opted for a Pre-EMI, the payment of Full-EMI begins only when the construction of the property is completed. You can also opt for a Full-EMI right from the beginning, regardless of the construction and possession of the property.

When Is Full-EMI Ideal?

  • If you wish to repay the home loan sooner, it is a good choice to opt for a Full-EMI right from the beginning of the home loan tenure, even if the home possession is some time away.
  • If you want to save on interest pay-out over the long term, a Full-EMI is advisable and should be preferred.
  • Opting for Full-EMIs is better than Pre-EMIs, if your financial situation and cash flow allows you to do that.

Let’s understand Full-EMI with the help of an Example:

Suppose you have taken a home loan of Rs. 50 lakhs for an under-construction property. You have opted for a Full-EMI hence you pay EMI on entire loan amount of Rs 50 lakh. At a rate of 8.5% p.a., the Full-EMI for a loan of Rs 50 lakh for 20 years will be Rs 43,391. By paying Full-EMI, you will be able to pay off your home loan sooner.

Difference Between Pre-EMI and Full EMI.

Loan disbursal: The Full-EMI option is usually chosen when the loan amount is disbursed at one go. However, you can opt for part disbursement too. On the other hand, the Pre-EMI option is preferred when the total loan is disbursed in parts.

Interest rate calculation: The interest rate for Pre-EMI is calculated based on the loan amount disbursed, whereas in case of Full-EMI option, the interest rate is calculated based on the principal loan amount.

Loan tenure: Since you will be paying a higher monthly instalment in case of a Full-EMI, the loan will be paid off sooner as compared to the Pre-EMI option.

Now that you are well-versed with the nuances of Pre-EMI and Full-EMI, ensure to make a well-informed decision while choosing between these two options. Regardless of whether you choose Pre-EMI or Full-EMI, you must make timely payment of your monthly instalments. Evaluate your repayment capacity carefully before deciding on the EMI amount. To get the EMI estimate, use a home loan EMI calculator. Also, make sure to check your loan eligibility using the home loan eligibility calculator.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.