What is Pre-EMI in Home Loans: A Comprehensive Guide
Let’s say you are planning to build a house, but you don’t have sufficient funds, so you visit house financing schemes. There are several schemes with many different options, but one thing common to all of them is the hassle of being bound to higher EMIs for a long time. At that point, you may want to reduce the hassle of these high EMIs, as not only will a house you live in, but you will also need furniture and many other things.
So, in this article, I will tell you about pre-emi, learning about pre-emis, and how they work. You will also learn how you can save money for furniture and other expenses when your house is under construction.
What is Pre EMI?
Pre-EMI or Pre-Equated Monthly Installment is the interest amount you pay against your loan when your house is under construction. The lender or the bank you took the loan from distributes the EMIs in two phases. Phase I is when the house is under construction, and Phase II, when the house is fully built and you get possession of your house. That’s how you pay in these phases:
- Phase I: You pay only the interest amount when the house is under construction, say for 2-3 years. It doesn’t include the principal amount.
- Phase II: Now, your house is fully built, and you have gotten possession of your house. This is the time when the bank will charge the full EMIs on you, containing Interest+Principal amount.
Using this method, you can keep the monthly cash flow low, and you will get room for saving until the property is built. Using this money, you can buy new furniture for your new house. In this, not only the exterior but also the interior will be the same as you dreamt of.
What is Pre EMI Interest?
It is basic interest which is just on the value of the loan that has been advanced at the prevailing home loan interest rate. Pre-EMI interest is easy and recalculated monthly on the amount of money giving out. Full EMI, however, is based on reducing balance approach.
For example:
- If ₹10 lakh is given out at 9% per year, the monthly Pre-EMI interest is (₹10,00,000 × 9% × 1)/12 = ₹7,500.
- Your Pre-EMI goes up as more money is issued (for example, extra ₹20 lakh).
According to the laws of Income Tax in Section 24(b), this interest will not be tax-deductible until the possession. You have an interest of up to 2 lakh in a year which you can receive after ownership of the property.
What is Pre EMI in Home Loan?
Still wondering what is Pre EMI in Housing Loan? As I have described above in detail, it is a two process of paying for a home. Some of the banks that provide the same include HDFC, ICICI, and Bajaj in case of homes or flats under construction.
Key features:
- This can only be used in properties that are still under construction (those that are ready to move in are not considered).
- The loan term will be 20 to 30 years, with a pre-EMI period of 1 to 4 years of time required to construct.
- Pre-EMI does not involve any repayment; hence, at the time of ownership, all the loans are repayable.
- In case you need to complete your loan sooner, lenders will also allow you to do a full EMI since Day 1.
The plan is ideal with more disbursements, and you would not have to pay interest on funds that are yet to be disbursed.
Pre-EMI vs Full EMI: A Quick Comparison
Wondering which to choose? It can be broken down as shown in the table below:
| Aspect | Pre-EMI | Full EMI |
| Payment Components | Interest only on disbursed amount | Principal + Interest on full loan |
| Monthly Outflow | Lower (e.g., ₹10k-20k initially) | Higher (e.g., ₹40k+ from start) |
| Total Interest Cost | Higher (no early principal pay) | Lower (Principal + Interest since day 1) |
| Loan Tenure | May extend after possession | Will get shorter |
| Best For | Tight cash flow during build | Long-term savings |
| Tax Benefits | Post-possession only | From Day 1 (principal under Section 80C) |
Example: You have taken a ₹50 lakh loan @ 9%, for 20 years. And asked for Pre-EMI (2 yrs), you will have to pay ~₹5-10k/month initially. And then Full EMI: ~₹45,000 will be fixed.
Pros and Cons of Pre-EMI
Advantages:
- Affordable Start: EMIs are significantly lower in the construction, which is an excellent thing for those who have limited income.
- Budgeting your money: Spend your money on furniture and other items when you move in.
- Flexibility: You are allowed to pay full EMI with the consent of the lender at any time.
- No Prepayment Penalty: This is normally provided on the interest component.
Disadvantages:
- Greater Overall Cost: The interest on the outstanding principal is increased with time.
- EMI Shock: You may get shocked or suffer a sudden financial shift when EMI suddenly shifts from ₹15,000 per month to ₹50,000 per month.
- Long Term: Pre-EMI may result in additional tenure in loan repayment.
- Low Taxes: No deductions till you move in!
Calculate how much you can afford to pay monthly using EMIcalculator.ai, and as much as you can afford to do so, select full EMI to save lakhs of rupees in interest.
How to Calculate Pre-EMI?
Formula to Calculate Monthly Pre-EMI = (Disbursed Amount × Annual Rate × 1) / (12 × 100)
Sample Calculation Table (₹50L Loan, 9% Rate, Staged Disbursement):
| Month | Disbursed (Cumulative) | Monthly Pre-EMI |
| 1-6 | ₹10 Lakh | ₹7,500 |
| 7-12 | ₹30 Lakh | ₹22,500 |
| 13-24 | ₹50 Lakh | ₹37,500 |
| Total Pre-EMI (2 Yrs) | – | ~₹6.3 Lakh |
Post-possession: Full EMI ≈ ₹45,000 for 20 years.
FAQs
What is the difference between Pre-EMI and full EMI?
Pre-EMI is only an interest on money that is applicable only under constructed homes. Full EMI not only pays the principal, but also pays the interest on the entire loan since the beginning of the loan.
Can one pay in advance before the EMI?
Yes, most banks allow you to pay back the principal without interest early without any fee charged, and this reduces the amount of interest you will pay in the future. This is also known as a down payment.
Is it possible to have a Pre-EMI in homes that are ready to be moved into?
No, it applies to properties under construction that have disbursements (walls, flooring, ceiling, paint) and that are phased.
And will pre-EMI damage my CIBIL score?
No, being able to pay on time gives you more points, but late payments may affect it.
Can one be able to convert Pre-EMI to full EMI in the midst of the process?
Yes, talk to your lender. As I have said above, they are flexible; you can shift from pre to full EMI anytime you want
Conclusion
Pre-EMI is an intelligent financial plan for those dealing in under-construction houses, which will enable you to control cash flow easily throughout the construction process. You only pay interest at the start, giving you the opportunity to finance the important things in life, such as furniture and interior, making your dream house a complete reality.
Although it can result in relatively increased costs and EMIs after the possession, the flexibility and the peace of mind it provides are more than a disadvantage to many. Always do a comparison of alternatives with the help of EMI calculators and discuss the most suitable one with your lender to fit in your budget. Choose Pre-EMI wisely, and move in with savings and a secure home.
