Should you opt for EMI or Pre-EMI for your Home Loan?

Updated on March 7, 20195 mins read
Home Loan EMI, Pre-EMI

What is Pre-EMI?

Pre-EMIs are installments that precede actual EMIs.

Pay for What You Use

If you purchase a property under construction and finance it with a bank loan, the funds are most often released in tranches by the bank. The disbursement is based on the proportion of completion of the project. Consequently, till you obtain possession of the house, you are faced with an option to service just the disbursed portion of the loan, instead of the entire amount sanctioned.

This essentially means the borrower needs to pay only interest and only on the amount disbursed till he is handed over the house. The repayment of the principal component sets in once the entire loan amount is disbursed or the possession of the house is turned over to the borrower. This ‘payment of only interest on the amount disbursed’ is Pre-EMI.

EMI / Pre-EMI – The Choice is Yours

Pre-EMI is an option available to the borrower. He must base his decision on his personal requirements after considering the loan mathematics involved.

Let’s use an example to understand the basic difference between EMI and Pre-EMI:

The first step is to familiarize ourselves first with the mathematical formula to calculate EMI:

[P X r X (1+r)^n]/[(1+r)^n-1] P = Loan amount or principal r = Interest rate per month n = Number of total installments

The easier route is to key in your data in an excel sheet and build your own Loan Amortization Schedule.

Now we shall describe 2 scenarios: Scenario I describes EMI, i.e. when the bank disburses the entire loan in one go. Scenario II describes Pre-EMI, when the bank gives the loan in tranches.

SCENARIO I Banks Disburses the Entire Loan Amount

emi or Pre-EMI

An EMI of Rs.24,365.50 becomes payable immediately. The Loan Amortization Schedule for the first 10 installments has been provided below:

emi or Pre-EMI

Since the bank in this case has funded the entire loan upfront, the borrower must start paying the principal as well as the interest components immediately..

SCENARIO II

Banks Disburses the Loan Amount in Parts

Banks generally disburses loans in 3-6 tranches. However, for ease of understanding, we project a scenario with Rs.1,00,000 being disbursed every month for 2 years of construction period. The schedule would resemble the following:

Pre-EMI or EMI

This is a very basic projection of monthly interest of Rs. 896 per lakh.

What it translates to:

Monthly EMI – Rs.24,365.50 (derived from Scenario I) Monthly Average Pre-EMI – Rs.11,200 (Derived from Scenario II) Difference between EMI and Average Pre-EMI = Rs. 13,166

Savings in Pre-EMI as above projected for 2 years = Rs. 13,165.50 *24 = Rs. 3,15,972

Of course, the borrower has to pay the EMI once he gets the possession of the property. Hence, he would pay Rs.24,365.50 per month for additional 2 years (after the Pre-EMI period gets over) if he opts for Pre-EMI.

To understand the full picture, we need to consider the time value of money. The Rs.3,15,972 savings in the Pre-EMI option (from above) could lead to 10% annual return through long term, active or prudent investing. And the borrower could end up with a sum of Rs.21,25,700 approximately. So, after paying for 2 additional years at the end of the tenure, he would still have a good lump sum saved up.

What are the factors you need to evaluate before choosing the Pre-EMI option?

As is apparent, the borrower faces lower cash out-flows for the first 24-36 months through the Pre-EMI route. However, this also translates to longer repayment tenure. The funds saved now, would need to be justifiably invested. Pre-EMI is an option and available to borrowers and as such demands careful consideration. Besides, paying of a debt sooner may also be a personal choice despite the numbers.

Here are some basic questions to aid the decision making process:

  • Do you have the cash flow to start repaying your loan fully?
  • Do you plan to keep the house property or sell it during or immediately after the construction?
  • Do you expect to earn rental income from the property?
  • Very importantly – what is the opportunity cost of the money you are saving for the moment
    • Would you be able to invest the balance elsewhere and generate good returns?
    • Do you require the balance for some other urgent expenses for the time being?

When should you opt for Pre-EMI?

The Pre-EMI option is suitable for you in the following scenarios:

  • If you have lower cash flows available in the initial years
  • If you plan to sell your property in the first few years, perhaps even at the time of possession
  • If you can invest the difference between EMI and Pre-EMI in a manner that you generate returns higher than the rate of interest (10-12% every year in the case of our example)
  • If you require the balance for some very important immediate needs

When is it advised to opt for EMI instead of Pre-EMI?

  • If you are eager to start enjoying tax benefits of the property investment
  • If the property is a long term investment (to move in yourself or let out) and you would like it to be debt-free at the earliest.
  • If you expect delays in the completion of the project and do not wish to wait long to start principal repayment.
  • If active investment does not seem feasible

Additionally, based on the builder’s work in the past, you may also want to consider if he  deserves to receive the entire loan amount at the start of a project or only based on his progress therein.

What is the Tax Angle on Pre-EMI?

Apart from the calculations, it is necessary to understand the tax angles on Pre-EMI.

Housing loan is governed by two sections of the Income Tax Act. The Section 80C, which we are all pretty familiar with and Section 24, which pertains specifically to Housing Property.

Any principal prepaid by an individual before obtaining ownership of a property, is not deductible under the Income Tax Act. This rules-out benefits under section 80C.

The interest paid in any form before possession of the property however, is tax deductible later. The total interest paid during the period before possession of the property can be divided into 5 installments and claimed for 5 consecutive years under section 24 upto a total maximum of Rs.2,00,000 per year. If the property is let-out, there is no upper limit to the claim under this section!

For example:

Let’s say a borrower purchased a property under construction in the year 2012. After construction, he was handed over the possession in the year 2013. Let’s say he paid a total of Rs.1,00,000 interest and Rs.50,000 as principal during the period 2012-2013. (Please note the difference between purchase  and possession).

There is no Tax Benefit under 80C on the principal paid of Rs. 50,000, since he does not own the property yet. However, the entire interest paid may be deducted in 5 installments under Section 24 upto a total maximum of Rs.2,00,000 per year. Taking from the example above, Rs.20,000 (Rs. 1,00,000 divided by 5) can be claimed per annum for 5 years from the Pre-EMI paid.

While Pre-EMI and EMI may be financial decisions, you would also need to consider finer points which are not easily evaluated. Market conditions for real estate investment, reputation of the builder, resale value of your project, your current spending capabilities etc. are equally important factors.


Suma Ganesh

Suma Ganesh

Suma is an MBA in Finance and Marketing from ICFAI, Bangalore. She worked as an investment advisor to retail and high networth clients for nearly 7 years at Allegro Capital Advisors Pvt Ltd. This gave her a first hand understanding of the needs of an individual customer. With this edge, she moved on to Adi FinShiksha Pvt Ltd, where she trained financial advisors to manage their clients' investments and financial needs. With deep understanding of customers and their advisors, Suma then moved on to writing content in the space of personal finance. she is currently working as part of the content creation team at SwitchME, addressing the needs of home buyers and home loan borrowers.
22 COMMENTS

Have a question? Post it here and we will get back to you within 1 working day.

  1. Ramakanth
    Aug 30 2018 at 12:12 pm
    Reply

    Hi I like the articles here, so I am posting my questions here. I have applied for a Home from HDFC for 5800000 for a under construction property in Bangalore & i will get pssession of house in 2020 December. Every quarter an amount of 7Lacks will be disbursed from my loan account. my questions are:
    1)I have enough cash flow, shall I go for EMI option rather than Pre EMI?
    2)I already have a housing Loan where I have a balance of 2 Lacs, am i eligible to get IT benefit from the new loan with EMI option (Possession is in 2020)

    Thanks,
    Ramakanth

    • Suma Ganesh
      Suma Ganesh
      Sep 28 2018 at 3:01 pm

      Hi Ramakanth,
      Thank you for your word of appreciation.
      1. You could extrapolate the following 2 scenarios
      (a) If you pay Pre EMI and invest the balance (EMI-Pre EMI) profitably
      (b) If you pay EMI and close your loan within 7-8 years
      Depending on which is more feasible for you and which saves you more interest cost, you could decide.
      2. For income tax benefit, please read our post Calculate Income Tax Benefit on Home Loan and Use Your Home Loan To Save Taxes

      It refers to total interest and total principal amount in a year. You can separately take benefit for self occupied and let out property

  2. Guru
    Sep 04 2016 at 3:57 pm
    Reply

    Hi,

    Thanks for the article – helpful.

    I am planning to go in for a property currently beginning construction, purely as an investment. It will be ready for possession and registration in Jan 2020 and I am going in for a loan of 40 lakhs. I do not intend to move in and plan to let it out for 3 years (rent @20k/month) after which I plan to sell it (3 years to avoid short term capital gains). I can afford to pay the entire EMI, however I am considering Pre-EMI since I intend to dispose the flat pretty soon. To maximise my ROI, I believe going in for a pre-EMI makes sense. Could you please clarify your views?

    Additionally, could you also clarify:

    1. Are pre-EMI payments toward interest only, or do they reduce principal outstanding as well? If they reduce principal, can I claim tax benefits – while apt is under construction?
    2. Given tax levy in the full-EMI option, would it net to be a benefit considering tax savings, assuming 30% bracket?

    Thanks for you help.

    • Sumita Nath
      Sumita Nath
      Sep 28 2016 at 12:03 pm

      Hi Guru,

      If you wish to dispose the flat soon, you can opt for pre-EMI. Yours answers are as follows:
      1. Pre-EMI payments are toward interest only and you cannot claim tax benefits.
      2. Yes Full-EMI option would give you a benefit considering tax savings.

  3. Kiran
    Aug 04 2016 at 12:45 pm
    Reply

    Pl. answer my query regarding pre emi interest tax deduction claim.
    I purchased a under construction flat in 2011 and got possession in 2014. i sold my flat in 2015. total pre emi interest is 250000. that means i was allowed to claim 50000 rs per year for five years, but as i have sold my property can i still claim the 50000 rs pre emi interest for rest of 4 years?? i have booked another flat this year for residential purpose.

    • Sumita Nath
      Sumita Nath
      Oct 03 2016 at 3:41 pm

      Hi Kiran,

      Sorry for the delayed response. You cannot claim tax for the pre emi interest for rest of 4 years as you have already sold your property within 5 years of purchase. Instead, you would be liable to pay the tax from the sold property.

  4. swati
    Feb 17 2016 at 10:52 am
    Reply

    Hi Tarini
    we have taken a loan from DHFL and as per the completion status of constuction they have disburse first portion of loan to builder and now as builder demands second disbursement , DHFL are asking me to pay some amount as PRE EMI to release the cheque. What it called , will you pls help us in understanding the loan procedure.

    • Tarini
      Tarini
      Feb 17 2016 at 3:44 pm

      Hey Swati

      As the property is under construction, you have an option of either Paying full EMI or pre- EMI. Its best if you can start paying full EMI from the beginning as this way you the total interest paid on your home loan will be lesser than what it will be if you started paying pre-EMI.
      After every part disbursement made by DHFL, you will be expected to make EMI payments (just in the case of a regular home loan). If you have the financial backing to pay full EMIs, then please compel DHFL to let you pay full EMIs from the beginning and demand an amortization schedule from them. Through the amortization schedule you will be able to see the exact break up of each EMI you pay, the value of each EMI and also the changes in principal component and interest component of the EMI over a period of time. I hope this helps! 🙂

  5. Rohit
    Jan 26 2016 at 6:21 pm
    Reply

    Hello, Very Good Information. Can you post an excel sheet with the Scenario II calculations as explained above for Construction linked disbursement of loan and PreEMI?

    • Tarini
      Tarini
      Jan 27 2016 at 4:31 pm

      Hey Rohit

      Thank you so much for your inputs, we will create and upload one very shortly 🙂

  6. garima
    Nov 24 2015 at 1:05 pm
    Reply

    HI I HAVE APPLIED FOR LOAN OF 6500000 FROM SBI IN NOV 2015, 5500000 HAS BEEN DISBURSED ACCORDING TO COMPLETION OF CONSTRUCTION OF MY FLAT, IN MARCH 2016 I’LL GET POSSESSION OF MY FLAT AND I’LL SELL MY CURRENT RESIDENCE AND PREPAY ALMOST 60% OF MY LOAN AMOUNT. SHOULD I GO FROM PRE-EMI OR EMI , FROM NOW TILL MARCH? PLS SUGGEST WHICH WOULD BE BETTER, AND AFTER PREPAYMENT HOW MY LOAN EMI WILL BE REDUCED IF I REPAY SUPPOSE 3500000?

    • Tarini
      Tarini
      Nov 25 2015 at 9:00 pm

      Hey Garima

      If you have the financial bandwidth, then it’ll be best if you pay full EMI as this way you will start repaying your home loan from the very beginning. This will also help keep the total cost of your home loan lower than if you pay Pre EMI (as with this option you end up paying more interest on the home loan). I hope this helps 🙂

    • garima
      Nov 26 2015 at 12:51 pm

      thanks Tarini for your reply, i want to know also what would be and how my emi would be calculated when i’ll pay 60% of my loan amount within a year.

    • Tarini
      Tarini
      Nov 27 2015 at 1:09 pm

      Hey Garima

      Thanks for the follow up, the EMI is always calculated on the outstanding principal amount. It will be done the same way even after you prepay 60% of your home loan amount. I hope this helps 🙂

    • avantika
      Dec 28 2015 at 10:26 pm

      how will you end up paying more interest on the home loan in case of pre emi

    • Tarini
      Tarini
      Jan 06 2016 at 3:10 pm

      Hey Avantika

      In the case of Pre-EMI, the borrowers need to continue paying interest initially for a pre-decided tenure. So the actual principal reduction starts happening only at the end of this tenure.
      If we compare this to a situation in which a borrower is paying full EMIs from the beginning, then principal reduction starts from the very first EMI payment.
      So in the second case, you end up paying lesser interest than the first. I hope this helps.

  7. Prashanth
    Nov 17 2015 at 5:49 pm
    Reply

    Hi.. I have a question, does bank support part payment during pre-EMI stages.
    Suppose its under-construction project of 3.5 years, where the money is disbursed in 16 slabs of 2.5L each for every 3 months (approx).
    And suppose if I can save monthly of Rs 75,000 for house from my salary, and then for first slab, pre-emi would be say 3000, can I pay remaining 72000 to principal? Is this part/pre-payment allowed if pre-EMI is opted?

    • Tarini
      Tarini
      Nov 18 2015 at 1:22 pm

      Hey Prashanth

      No, banks do not allow prepayment of home loan in the pre – EMI period. You can start making prepayments only once your full EMI payments start. Until then you will have to continue paying interest on the disbursed loan amount.

    • Prashanth
      Nov 21 2015 at 11:06 pm

      Hi. I did check with the bank with the following queries and got the response as below:

      Do bank support part/pre-payment during pre-EMI stages? where part/pre-payment done goes directly to principal?
      – Yes

      Is pre-EMI applicable for entire duration till possession or only for a period such as 18 months?
      – As discussed over the phone Pre Emi is applicable for entire duration till the final disbursement made to builder.

      Is there any minimum outstanding principal for a Loan account? Can I make it zero and also keep it alive for next disbursement?
      – Not Possible, as this is not banking practice

      Can I do pre-payment whenever I want (say monthly)?
      – Yes you can

      In the case of prepayment, banks might insist at least a certain amount be paid, say an EMI or two EMIs or, in some cases, a figure of Rs 1 lakh Are there any different conditions for pre-EMI and EMI?
      – Its more than one EMI amount

      How is the next pre-EMI calculated? Is it for the outstanding principal (disbursed amount minus pre-payment amount)?
      – Its Outstanding Principle amount

      After the property is constructed, i.e, loan disbursement to builder completes, is the EMI that would start is calculated only for the outstanding principal?
      – Yes, the EMI calculated on Outstanding principle amount

      Is pre-payment option only for floating internet loan or applicable for fixed too?
      – Pre payment option is available for all types of loan.

    • Tarini
      Tarini
      Nov 23 2015 at 8:00 pm

      Hey Prashanth

      Thank you so much for sharing these details with us, its great insight and will surely benefit all our readers! 🙂

  8. Vishvesh
    Jul 22 2015 at 6:00 am
    Reply

    I am planning to buy a house worth Rs. 80,00,000. I intend to invest up to Rs. 40,00,000 from my saving and remaining 50% from the bank loan. I currently paid 20,00,000, remaining 20,00,000 I would generate by 2017 when my flat will be ready.

    My question is should i go for EMI option or pre-EMI option. Because if I go for EMI, it will effect my ability to generate the pending 20,00,00 and If I go for pre-EMI I would end up paying more interest.

    Based on your points for pre-EMI

    1. If you have lower cash flows available in the initial years
    2. f you can invest the difference between EMI and Pre-EMI in a manner that you generate returns higher than the rate of interest (10-12% every year in the case of our example)

    pre-EMI looks like a better option but I am not sure.

    Can you please help me with this decision making?

    • Tarini
      Tarini
      Aug 12 2015 at 6:15 pm

      Hey Vishvesh

      Considering the information shared by you, going for a pre-EMI does seem like a better option. This way you will be able to generate the remaining 20 lakhs over the next few years. However, I’d like you to consider the fact that this will add to the total cost of your home loan, increasing the total amount of interest you pay over the entire tenure. So if you are sure that this will not disturb your financial balance, then it seems like the best option available 🙂 I hope this helps!