Pre-EMI or Full EMI: A complete guide to choosing the best home loan option

A home loan is essential while buying a house as property prices have been on a steady rise. Home loans come with multiple options. The difference between ‘Pre-EMI’ and ‘Full EMI’ in home loans is a key metric that you should understand before you make a choice.

Pre-EMI (Equated Monthly Instalments) is the interest paid on a loan taken for an ‘under construction’ property. When you opt for ‘Pre-EMI’, the disbursal of the loan is done in stages depending on the progress of the construction of the property.

But you have to pay interest on the amount that is disbursed and the full repayment (including principal and interest) will begin only when you take possession of the property.

Here is a guide on the key differences between ‘Pre-EMI’ and ‘Full EMI’ in home loans and the option that will suit you.

What are the advantages of ‘Pre-EMI’ and who can take it?

Pre-EMIs involve significantly lower amounts of money compared to ‘Full EMIs’ as the outgo is only towards interest payments. It eases the financial burden of the home-owner considerably in the initial phase when she/he has not taken physical possession of the property.

Pre-EMIs help you manage cash flows effectively during the construction phase of the property. This ensures that your financial stability is maintained. It is ideal for those who live in rented accommodation as it will help them pay both the rent and the EMI. You can also choose ‘Pre-EMIs’ if you plan to sell the property within a few years of buying it or as soon as the house is constructed.

“It is possible to sell the property as soon as the construction is completed or after a few years of its construction under the pre-EMI option. You cannot sell the property for a fixed period under the full-EMI option,” according to IndusInd Bank’s explainer on home loan EMIs. Pre-EMIs are an excellent option when you do not have enough resources and need the money immediately to finance the payment.

What are the disadvantages of ‘Pre-EMI’?

The biggest disadvantage of ‘Pre-EMI’ is that your interest payments will be higher than the ‘Full EMI’ option. Your monthly payments will also be longer as your loan tenure will officially start only when you take possession of the property.

For instance, if you are availing a home loan of ₹50 lakh at an interest rate of 8.5% per annum for a tenure of 20 years and the property’s construction is completed in two years, choosing a ‘Pre-EMI’ will stretch payments to 22 years (Two years of ‘Pre-EMI’ and 20 years of ‘Full EMI’).

Let us say that you opt for a disbursement in four tranches during the construction phase— ₹5 lakh initially, additional ₹5 lakh after six months, another ₹5 lakh after one year and finally ₹5 lakh after 18 months and then start paying the regular ‘Full EMIs’ from the third year.

In the first tranche, your ‘Pre-EMI’ will be ₹3542 ( ₹5 lakh x 8.5%/12), from the second tranche the ‘Pre-EMI’ will rise to ₹7083 ( ₹10 lakh x 8.5%/12), from the third tranche it will go up to ₹10625 ( ₹15 lakh x 8.5%/12) and finally ₹14167( ₹20 lakh x 8.5%/12) ₹28333.

So, your ‘Pre-EMI’ payments alone will work out to around ₹212500 for two years. But if the project’s construction gets delayed, ‘Pre-EMI’ payment period will go up, further increasing the overall costs.

What are ‘Full EMIs’?

‘Full EMIs’ are regular EMIs that you need to pay once the entire loan amount is disbursed. They comprise both the interest and principal amount. These EMIs continue until the loan is fully repaid. ‘Full EMIs’ usually commence after the property construction is completed and the home loan borrower has taken possession.

“Since full EMIs cover both principal and interest, you end up paying less interest over the loan tenure compared to pre-EMIs,” HDFC Bank said in its explainer on home loan EMIs. As explained earlier, the loan tenure on ‘Full EMIs’ is relatively shorter because you start repaying both interest and principal immediately.

Though ‘Full EMIs’ are an ideal option due to lower overall costs and loan tenure, they would exert more pressure on your cash flow initially due to the higher monthly repayments. With ‘Full EMIs’, the principal loan amount and the loan tenure decrease with each monthly EMI payment which is not the case with ‘Pre-EMIs’.

How about the tax benefits?

Both ‘Pre-EMI’ and ‘Full EMI’ qualify for tax benefits. But there is a catch. You cannot claim tax deductions on the interest that you pay during the construction period. But once you own the property, you can claim the interest paid during construction in five equal instalments for a tax deduction of up to ₹2 lakh per year.

Since you can claim tax benefits on both the interest and the principal components of‘Full EMI’ payments, it is a much more tax-efficient option compared to ‘Pre-EMIs’. Under ‘Section 80C of the Income Tax (IT) Act’, the tax benefit for the repayment of the principal amount is limited to ₹1.5 lakh per year.

The tax benefit for payment of the interest amount under Section 24 of the IT Act is capped at ₹2 lakh per year in the case of a self-occupied residential property. However, there is no limit for a property let out on rent or lease.

So, which option is better?

It entirely depends on your financial situation and goals. Do remember that ‘no one-size-fits-all’ when it comes to choosing between ‘Pre-EMIs’ and ‘Full EMIs’. Your decision should be based on circumstances, risk tolerance and objectives.

If you are comfortable with a longer loan tenure and are willing to pay higher interest costs to ease your immediate financial burden, you should go for ‘Pre-EMIs’. But be doubly sure that the project will be completed within the estimated timeframe. If you want to minimise the overall interest cost and repay the loan over a shorter tenure, then opt for ‘Full EMIs’.

Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.