When is pre-EMI advantageous?

Pre-EMI is a loan repayment program where your monthly payments wholly go towards payment of interest accrued on the loan amount that has been disbursed. Contrasted with typical full-EMI programs, pre-EMI programs differ in a few key points. Before you commit yourself to a payment plan, you would do good to properly acquaint yourself with the various advantages and disadvantages of a particular choice. Often what is suitable for one individual is not favourable for another; it is necessary that you pick the plan that is best suited to your needs and desires.

When is pre-EMI advantageous

Usual “full-EMI” programs split the payment between the interest and the principal amount owed; this split is done according to a document called an amortisation schedule. In the beginning, a greater part goes towards paying interest, but this ratio skews the opposite way further such that the split towards repayment of the principal increases over time. In these plans, the principal amount starts reducing from your very first payment.

Not so with pre-EMI plans. Since 100% of your payment goes towards the payment of the interest, the principal amount you owe the lender remains unchanged until the entire principal has been disbursed. Pre-EMI payment options are typically offered for customers of home loans for projects that are still under construction; the interest payable depends on the total amount that has been disbursed. Therefore, your EMIs go up as you draw down more and more of your principal. And once 100% of the principal has been withdrawn, presumably after completion of construction and after you take possession of the premises, you need to make payments on the principal.

It should be said forthright that for most cases, going for the full-EMI option makes the most financial sense. Although you do pay a slightly higher amount every month, you also reduce the principal amount you owe. This goes a long way in reducing your liabilities in the future, as far as loan payments are concerned. Also, payments in the pre-EMI form are not tax deductible as full-EMI payments are (albeit in a 5 year spread instead of annually). Delays in construction or possession also disadvantage you significantly, something you should definitely keep in mind.

However, there are a few situations where going for the pre-EMI option can be beneficial.

  • You cannot afford to make full-EMI payments
    If you are strapped for cash and cannot afford to make the higher payments under the full-EMI plan you might choose to go for a pre-EMI plan. Keep in mind though that in the long run, you will pay a lot more under a pre-EMI plan since your principal does not reduce until after you take possession.
  • You plan to sell the property as soon as it finishes construction
    If you are buying the home as an investment, you might very wisely choose to pay only the interest for the duration of the construction and then pay the remaining principal amount as a lump sum after you sell the property. This way you minimise your risk as well as your liabilities.
  • You can consistently earn a good return by investing the money you save over a full-EMI plan elsewhere
    If you are a skilled investor and believe that the opportunity cost of investing in a full-EMI plan is too high and that extra money can be made to yield a good enough return to offset the greater net payment in a pre-EMI plan, you might choose to go with a pre-EMI plan. Keep in mind that typical loan repayment plans are of a duration of 10 to 20 years, sometimes even 30.

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