InvestorQ : Pre-EMI payment option is best suited for what kind of borrowers?
Pratik vyas made post

Pre-EMI payment option is best suited for what kind of borrowers?

Manisha Mehta answered.
3 years ago

Among the many options home buyers get to choose from when they take a loan is the one between pre-EMI payment and EMI payment.

EMI payment is when you repay a home loan, inclusive of principal amount and interest amount, once the construction of the house or building is completed.

Pre-EMI payment, in contrast, is when you only pay the interest applicable on a loan and this amount has to be paid when the house/ building is being constructed. The pre-EMI period ends once the construction is completed.

The pre-EMI amount is lower than full EMI amount, as only the interest part of the loan has to be repaid, while the principal loan amount remains as it is.

Pre-EMI payment is best suited for:

  • Those borrowers who wish to save money during the pre-EMI period and invest it in a manner that they get good returns on the amount. The money or the interest amount which will be saved from pre-payment of loan and invested in a good savings scheme for better returns should be taken into consideration for calculation. This will determine which pre-payment option should one opt for.

Let’s consider this with an example. Say the full EMI payment is Rs. 25,000, of which the interest contribution is Rs. 5,000. By choosing to pay pre-EMI only, i.e., Rs. 5000 interest only, the borrower can invest the remaining Rs. 20,000 elsewhere and earn consistent returns. These returns can, in turn, help you pay the EMI at a later stage.

  • This pre-EMI option is also ideal for property investors who are purchasing the property as an investment and intend to sell the property once construction is completed.
  • Those who are waiting for a hike in their income or cannot afford to pay a full EMI at the moment will find pre-EMI payment to be the best option.

Do note, however, that both pre-EMI and full EMI repayment enjoy the same tax benefits. Tax deduction is not applicable during the under-construction phase, but once the borrower obtains the possession certificate, then the amount paid as interest (in pre-EMI or full EMI option) will be aggregated and is considered for tax deduction in five equal instalments.