- The opportunity cost of the money could have been paid as full EMI, and the opportunity cost of the money that could be invested in a savings scheme will help in determining which repayment option must be chosen.
- Pre-EMI also fits for property investors who want to trade the property after the construction is completed.
Those who are expecting a change in income or people who cannot afford to pay the full EMI while taking up the loan will know that pre-EMI payment is the best option.
- People who wish to pay the loan amount in full after the construction of the building is completed
- People who face the risk of delay in construction, full EMI would mean that the borrower will be required to make payments towards the Pre-EMI for an extended period, which would make the total cost for availing the loan higher.
The Pre-EMI and full EMI repayment method for a home loan have the same tax benefits. Tax deduction is not applicable if the building is in the construction phase. After the borrower receives the possession certificate, the amount paid as interest will be aggregated, and it'll be filed for tax deduction under five equal installments
Conditions for choosing Full-EMI option conditions
Here is a list of conditions under which choosing the Full-EMI option is beneficial:
- You have purchased the property as a long-term investment
- You wish to repay the debt at the earliest
- You want to enjoy the tax benefits as the repayment starts
- You can foresee a delay in the construction
- You don't have any other option for investing your funds
When should you take Pre-EMI option?
- The individual has limited money to manage their monthly finances and pay the EMI simultaneously.
- The borrower is planning to sell the property after the construction has been completed.
- The applicant wants to sell the property after the construction has been completed.
- The customer has an urgent credit requirement.
- The individual wants to invest the difference amount between Pre-EMI and Full-EMI to gain additional returns.
Tax benefits of Pre-EMI vs. Full-EMI
- During the first two years, there's no difference between Pre-EMI and Full EMI.
- The principal amount of Pre-EMI is always lesser than the principal amount of Full EMI.
- There is no added benefit to the repayment of the principal/interest amount for Pre-EMI.
- The interest amount of greater than Rs.2 lakh is paid between 3-7 years in both Pre-EMI and Full-EMI.
- Through the Full-EMI option, the loan is paid back much faster as compared to the Pre-EMI option.
In conclusion, it can be said that there aren't many tax benefits for paying the interest amount during the pre-construction through Pre-EMI option as compared to the Full-EMI option.
Difference between Full-EMI and Pre-EMI
The Full-EMI option is typically picked when the loan amount is disbursed for a single time. On the other hand, the Pre-EMI option is generally chosen when the total loan amount is disbursed in parts.
Interest rate calculation
The interest of Pre-EMI is compounded based on the total loan amount distributed to the builder while the interest for the Full-EMI option is estimated based on the principal loan amount.
Loan repayment tenure
Since the monthly installments under Full-EMI are made up of a significant portion of the principal amount, the debt is paid sooner by choosing this option.
The monthly payments start from the beginning of the construction in Pre-EMI option. Whereas, under the Full-EMI option the payments begin after the completion and ownership of the property.
Impact on the components of the loan
After making the payment towards subsequent EMIs under Full EMI, the principal amount and the interest rate is reduced. On the other hand, EMIs paid via the Pre-EMI option don't have any effect on the principal loan amount, rate of interest and tenure.
Resale of property
If a borrower uses the Pre-EMI option, they will be able to sell the building right after the construction is completed. Individuals who avail the Full-EMI option won't be able to sell the property right after the construction has been completed.
Impact on finances
Paying EMI through Pre-EMI is easier on the pocket since the borrower is required to pay only the interest during the pre-construction period.