Pre EMIs burning your pocket?

EMI Calculation

Home loans are long term financial instruments that affect your pocket for a long term. Any excess payment made towards home loan repayment can stretch your budget and hamper your overall finances. Paying a pre EMI for under construction property is one such payment that can burn a hole in your pocket without reducing the principal amount of the home loan. The good news however is that pre EMIs can be avoided without compromising on buying an under construction property. Here are some ways that can help you avoid pre EMIs and make sure your home loan does not pinch your pocket in the long term.

Understanding Pre EMI: In case you are buying an under construction property, the full loan amount is not paid to the builder immediately. Banks would release the loan disbursement according to the payment schedule of the builder and as per the progress of the project. Before the entire loan is disbursed by the bank to the builder, you would need to pay a pre EMI which is interest on the amount disbursed to the builder by the bank. This pre EMI does not reduce the principal amount for the home loan and only caters to the interest of the initial payment made to the builder. So in case the builder takes 24 months to complete the construction, you will have to pay pre EMI installments every month before your regular home loan EMI starts.

Since pre EMIs increase the overall costs of the home substantially they are best avoided. But how does one avoid a pre EMI cost in case you are buying an under construction property? There are two distinct ways in bypassing the Pre EMI payment in case you are buying a property which is under construction.

Advance Disbursal Facility: A simple way to avoid the pre EMI payment is to opt for an advance disbursal facility for your home loan. While taking a home loan always make sure that your home loan offers an advanced disbursal facility. Under the scheme the bank or NBFC offers the entire amount to the builder as soon as your loan is approved. While the construction of the property is still under progress, the bank usually offers the full loan amount as an advance. Under the advance disbursal facility, your EMIs start with immediate effect once the bank pays the builder. But banks offer this scheme only to top rated builders whom they have trust or those builders who have availed project financing with them.

Tranche Based EMI Facility: In case your bank does not offer an advance disbursal facility for the home loan, you can choose to exercise the tranche based EMI option. Under a tranche based EMI option you can start repayment of the home loan right from the time of the first disbursal by the bank.

Tranche EMIs are of 2 types: Either you can start repayment of the entire loan soon after the receiving the first installment or you can pay tranche based EMI for the amount disbursed till the property is under construction. Once the property is ready, you can resume the repayment with regular EMIs.

Unlike Pre EMIs, any amount you pay under tranch EMI would go towards principal repayment and thereby it helps you to reduce your principal outstanding amount before complete disbursement of the home loan making it a win-win situation for both you and the bank.

Example Calculations for Tranche Based EMI:  Let us assume you have sanctioned a housing loan of Rs. 30 Lakhs for an under construction property with a loan tenure of 20 years. Let us also assume that the period of construction by the builder is fixed at 36 months and the first installment paid towards the builder by the bank is Rs.2 lakhs. Let us also assume your effective EMI comes to Rs. 30,000 per month once the construction is complete. Now in case you exercise a tranch EMI option, you pay out Rs.30, 000 per month right from the first disbursement time.

In the partial type, considering all the above situations you start EMI for 2 lakhs ( the disbursed amount). And when the next disbursement is made- say suppose another 3 lakhs after 6 months, you start repaying EMI for 4 lakhs and so, till the entire loan amount is disbursed. Effectively by the time the regular EMIs start your principal home loan amount gets reduced. This reduces your monthly EMI as well for the remaining tenure of your home loan.

YOU MAY ALSO WANT TO: Check your EMI options using our Home Loan EMI Calculator.