Pre-EMI vs Full EMI – Understanding payment schemes for under-construction properties

When you purchase an under-construction property, your bank may link the disbursal of home loan to the construction stages of the property. In such cases, you will either be asked to pay pre-EMI OR given an option to choose between pre-EMI and full EMI payments.



What is Pre-EMI?

As you are probably aware, Equated Monthly Instalment (EMI) consists of Principal and Interest components. Pre-EMI is just the interest portion on the disbursed loan amount that you pay until the full disbursal is done. i.e., your home loan behaves like an interest-only loan on the disbursed amount until the completion of construction. Your EMI payments start after the pre-EMI phase. Until then, your money does not reduce even a paisa of the outstanding loan amount.

Lets consider an example where you are borrowing ₹ 40 lakhs @ 10.5% interest rate with a tenure of 20 years for an under-construction property. Lets say, the bank disburses the loan amount in 4 stages.

MonthStageAmount DisbursedPre-EMI
01-JanOn agreement₹ 10 lakhs (20%)₹ 8,750
01-JulOn completion of foundation and ground floor₹ 10 lakhs (20%)₹ 17,500
01-OctOn completion of first and second floor₹ 10 lakhs (20%)₹ 26,250
31-DecOn completion of third floor and possession₹ 10 lakhs (20%)₹ 39,935 (EMI)

As illustrated above, you would pay (8750 x 6) + (17500 x 3) + (26250 x 3) = ₹ 2,36,250 as pre-EMI (interest) towards the disbursed loan amount. Your EMI of ₹ 39,935 for the remaining 20 years starts from 01-Feb (i.e., a month after final disbursal).

Pre-EMI vs Full EMI

Some banks allow you to pay full EMI even when the disbursal is being done in stages. If you choose ‘EMI under construction’ option,  you will start paying EMI from the beginning of construction, but your interest amount will be calculated based on the amount disbursed to the builder and the rest of the amount will be counted towards principal. i.e., EMI remains the same but the principal portion of the EMI would be higher and loan gets repaid quickly.

If you are given a choice between paying pre-EMI vs full EMI during the construction phase, which one should you choose? There are many arguments for and against choosing between pre-EMI and full EMI. Paying full EMI, instead of pre-EMI, makes financial sense in all cases except the following:

  • You are a financial expert who is capable of earning good returns consistently by investing the small principal portion elsewhere. Remember that you pay less Principal and more Interest during the initial loan tenure.
  • You are an investor looking to sell the property as soon as the construction is complete.
  • You are strapped for cash at the moment and expect a salary raise before you get possession of the house.
  • You are renting while waiting for property possession and cannot afford to pay both rent and full EMI at the same time.
  • You love giving (more) money to the lender for longer duration – the construction period (typically 1-3 years) plus loan tenure (typically 10-20 years).

On the other hand, paying full EMI ensures that at the time of possession, you experience the satisfaction of having paid off a portion of the outstanding loan amount along with the joy of owning a home.

What if the Builder agrees to pay the pre-EMI?

Special Offer
Read the fine print on “special” offers

Lenders and builders offer myriad schemes for under-construction projects that are hard to understand for buyers. Note that builders (and lenders) keep coming up with innovative schemes to attract buyers. One such scheme is the 80/20 scheme.

80/20 (or 90/10 or 75/25) scheme

This notorious scheme involves buyer making a 10 – 25% down payment towards the home and the rest is disbursed by the banks / HFCs. RBI took a serious note of Advance Disbursal Facility (ADF) by banks, wherein the developer gets an upfront disbursal of the entire loan amount without any linkage to the construction stages. In most cases, the builder would offer to pay the pre-EMI on behalf of the buyer for a fixed period. RBI advised banks against such borrower un-friendly schemes because a)  it would mean developers getting access to funds at cheaper interest rates and b) buyer would be left to fend for himself if the builder delays (or stops) either the pre-EMI payments or the project itself.

Do not agree to advance disbursal even if this is the only exciting project in town and the builder happens to be your very own Mama or Chacha.

Caution: More than half the projects are delayed

Anytime a builder talks about always delivering on time, show him this metric related to on-time completion of housing projects in various Indian cities. Penalty clauses and cancellation options may be inadequate to protect you against project delays and consequent financial hardship.

Residential Project Delays in Indian Cities
% of residential projects completed on time in various Indian cities (Source: Economic Times)

Tax considerations

Interest paid, as part of pre-EMI or full EMI, is not tax deductible during the construction phase. Once you get the possession certificate, the interest component of the pre-EMI (or full EMI) is aggregated and deduction is allowed in five equal instalments beginning from the year in which the construction is completed.

For example, if the total interest was ₹ 2,00,000 during the construction phase, you can deduct ₹ 40,000/year for first 5 years from the date of final disbursement.

However, principal amount paid as part of full EMI during the construction phase is not tax deductible.



44 responses to “Pre-EMI vs Full EMI – Understanding payment schemes for under-construction properties

  1. Could you please explain why it is beneficial to pay Full EMI if i have to pay the SAME interest. On the other hand, i can earn interest on the money for one year instead of giving it to the bank for no benefit.

    1. U r NOT paying same interest.
      Watever int u pay during pre emi,
      JUST GOES DOWN THE DRAIN.
      This scheme is plain cheating.
      The bank gets additional interest for nothing.
      Good for the builder, if the bank disburses the loan to him asap.
      They stress on the fact that u pay EMI only after possession. So the loan taker is happy.
      They say u pay only interest. But they dont tell u this interest payment is additional for the loan taker

  2. Sir I have taken a home loan from IDBI bank & my property is under constructions.My PRE EMI has started from January,2014 & still I am paying that as the property is still under constructions.Now I had already paid last 7 months Pre Emi of my disbursed amount from the bank.I really do not have any Idea about Pre EMI & Full EMI before reading this article.Now my question is that isn’t the bank responsibility to educate his client about Pre Emi & Full Emi ?Is there any possibilities to make it Pre EMI to full emi?Need your best opinion in this regards-Amit

  3. Hi Poornima, First of all thank you for your blog. It is really helpful.
    I have couple of questions a) under what section we can claim the tax benefit on pre-EMI interest after possession? b) will it be over and above 80EE tax benefit on interest. For example, if the interest tax benefit limit is 2 lakhs, and aggregated pre-EMI broken to 5 yrs(40k from your example) , then can i claim 2.4 lakh in the year after possession.
    Thanks for helping.

  4. hi Poornima,

    Many thanks for this blog. I want to understand one point here. Suppose house price is 60lac and i do a down payment of 20 lac and i take 40lac loan. suppose for 40 lac loan interest amount is 50lac. Now as per pre emi if I pay ₹ 2,36,250 as interest before the possession then after possession do i still need to pay 50lac interest or 50lac less the pre emi amount?

    one more doubt if the builder says that they will pay the pre emi but instead charge some 300Rs per sqft extra, shall i go for this no pre emi scheme. I want to understand that which will be beneficial for me in this condition. whether to pay 300Rs per sqft extra with no pre emi scheme till possession or save that 300Rs per sqft price and pay the pre emi.

    Looking forward for your reply and thanks in advance.

    Thanks
    Shashi.

    1. Answers to your questions

      1) Every rupee of your pre-EMI goes towards paying the interest and so your principal balance does not reduce. After possession, your full EMI will start paying down the entire 50lac.

      2) Based on the above answer, you should do the math to understand the trade-offs. Also, find out from the builder how long he will pay the pre-EMI. What if there are construction delays?

      1. I booked one flat in Ruparel elavia( newly launched) dadar east.The project is under subvention scheme with financier L&T finance 5-90-5. I paid token money Rs 5 lakhs but after reading risks about this scheme am in dilemma whether to pay all 5% money or to stop and this is for sure if I stop paying all 5% I will not get that Rs 5 lakhs which I gave as token. While I was booking no agreement for sale is ready but he said that possession will be in December 2018 and builder will pay pre-emi till date of possession but after reading your article I asked the financier( L&T finance) to send tri party agreement. In that agreement there is a clause saying that subvention period is till 24months or till possession which ever is earlier till subvention period builder will pay pre-emi and after that buyer is responsible So I called the builder, he said that to tell financier to change the clause to till possession and I called L&T finance and this gentleman saying that he cannot change any clause in the agreement but he told me to take a letter from the builder saying that builder will pay the pre- emi if the project gets delay after 24 months till possession and builder also agree to give the same letter. My doubt is how much the letter will be legal if builder fails to pay Pre-emi in case of delay in the project? Can I put legal case on builder using that letter if builder doesn’t pay pre-emi after subvention period? Can I trust Ruparel developers or not? And lastly what will be the better option I should let go Rs5 lakhs in order to avoid risk in future or I should go for it?

  5. Hi Nitin,

    I have applied for home loan in PNBHFL and I got a loan details. In this its mentioned as “In Partly disbursed cases, pre-emi interest would be payable on total disbursement amount till the time loan in fully disbured”. I asked the bank to go for full EMI, but they say since your flat is in under construction all banks will only calculate your emi in pre emi stage untill the possession. So please let me know if this is right?.

    Regards

    Manoj

  6. Hi,

    I have applied for home loan in PNBHFL and I got a loan details. In this its mentioned as “In Partly disbursed cases, pre-emi interest would be payable on total disbursement amount till the time loan in fully disbured”. I asked the bank to go for full EMI, but they say since your flat is in under construction all banks will only calculate your emi in pre emi stage untill the possession. So please let me know if this is right?.

    Regards

    Manoj

    1. this is not true, banks will give you option to chose from preemi or full emi..,it is a choice for you and not the bank…, moreover you can have an option of tranche emi..as given by some banks

  7. Dear Poornima,

    I am buying a flat in NCR under a scheme NO EMI till Possession. And I have received a MOU from the builder on the e-stamp paper saying the below:

    That the tenure of this subvention scheme, as approved by is 36 months. The Developer expects to offer possession of the booked unit to the Buyer by that time. However if due to any reason, the possession offer of the booked unit gets delayed, then the developer undertakes to pay the Pre EMI only to the Buyer even after 36 months.The payment of Pre EMI shall continue till offer of possession with regard to the booked flat is issued to the Buyer.

    Now, as per my understanding when the Loan EMI will start after 36 months there will be nothing like Pre EMI, so what the builder will pay to me. So after having long conversation with the builder they have finally given a written confirmation on my email id thru their company mail id saying “After 36 months Builder will pay the Interest part of the EMI”. But when I asked them to update the same in e-stamp paper they are not agreeing to that and making lame excuses like long procedure, not in my hand, blah blah.

    My Question is: Please guide me if the mail I have received from them thru the builder company mail id (not agent) is sufficient enough as a proof that they will pay the Interest part of the EMI (which as per them is same as Pre EMI as mentioned in MOU)

  8. Hello Poornima,

    I have recently made a Balance transfer from Indiabulls to PNB. PNB issued the cheques which reached me on 5th Jan and was given to Indiabulls on 8th Jan and it was processed on 11th Jan as in amount realised.

    Now PNB has triggered their first full EMI on 25th Jan wherein I had already paid my EMI to the previous vendor on 5th Jan which is making me techincally poy 2 full EMI’s in the same month. Request your thoughts/suggestion to mitigate this problem.

    Regards,
    Raj

  9. During under construction my bank (hdfc) offers me an emi which varies with every disbursement. So it may be a pre-emi but it also includes a minor principal component. I confirmed its not a full emi scheme, but still has this benefit. The only drawback is the loan term gets reset after every disbursement. So will I end up paying more ?

  10. I have taken a loan of 53 lakh from sbi maxgain. Its an investor flat that I have bought, the property is still under construction, but as it was a resale, so I had to pay the whole sum to the reseller (investor). Therefore, my whole loan of 53 lakh is disbursed at the moment. I have 2 options to go with right now, either be on payment holiday (just pay simple interest for next 6 months until i get the possession) or start the EMI. I want to know if I opt for payment holiday and pay just simple interest, then:
    –>would I be able to withdraw the surplus funds which I plan to deposit in the max gain account or not? as its an under-construction property but whole disbursement is already done. Please let me know.
    –>Also, from where could i download the excel spreadsheet?

  11. Sir I have taken a home loan from IDBI bank & my property is under constructions.My PRE EMI has started from July,2014 & still I am paying that as the property is still under constructions.Now I had already paid last 8 months Pre Emi of my disbursed amount from the bank.I really do not have any Idea about Pre EMI & Full EMI before reading this article.Now my question is that isn’t the bank responsibility to educate his client about Pre Emi & Full Emi ?Is there any possibilities to make it Pre EMI to full emi?Need your best opinion in this regards kapil . kapil.paunikar@gmail.com

  12. Can I continue to get exemption on Pre-EMI interest (4th and 5th instalment) even if I have prepaid all my Home loan.

  13. Sir, I have taken home loan from citybank of 9.5 %interest rate in 2006. I have received a notice from citybank, that my interest rate increase as a 14.5%. Sir this is legal, yes or no. & no then can i do?, please suggest me

  14. Hello Poornima, Please have a look into my concerns. My account opening date with AXIS BANK HOME LOAN as 28th April 2015, Date of disbursement:-28th April 2015.
    Repayment Start date:10th May 2015, Repayment Cycle: 10th May 2015. Loan Sanctioned Amount:960000(which is required). Type of interest:-Floating, Rate of interest:9.95%, Number of installments:324, Disbursed Amount:720000, No Of Pre emi:-6, EMI Amount:-8549, I am getting the property possesion on diwali.What should i opt Pre-emi or Full emi? Please guide me

  15. Hi sir. I am buying a flat which is under construction. I have rental income from other properties as well. Can the interest paid during the construction period be adjusted with rental income as well.

  16. Hello, A home loan of 12 lakhs is sanctioned and I have taken only 2.5 lakhs so far and paying the pre-EMI for this 2.5 lakhs. The bank is now forcing me to take the whole amount although the house construction is not yet completed. It has already been one year now since the loan was sanctioned and it might take another year or so for the house construction. Do I have the right to NOT accept the entire amount until the house construction is complete?

  17. Hi
    I am planning to buy a under construction flat for Rs,2600000/- , for which I will need loan of Rs,1200000/- from sbi. Now suppose bank pays home loan( in installment, construction stage wise) for Rs,651000/- & i want to repay the bank loan , is it possible ?

  18. Hi,
    I purchased the house in March 2014 from Vinay Unique Gardens in Virar under 20/80 scheme. While talking the house they promised to pay the pri-emi till the time I get the possession of the house. They had been paying interest all this while since the disbursement of the loan amount. They promised to to give the possession of the house by January 2016. They send me a 100% completion of work done from the architect. And now they are saying they will not be paying the pri-emi charges. Now I will have to start paying the full EMI to the bank at the same time they are not giving me the possession of the house saying that they have not got the OC certificate yet. They are saying that they are expecting OC certificate by May or June of this year in the mean while I will have to continue paying the EMI every month. Due to the lack of information on understanding what is 100% completion of work done by the architect all this happened. I assumed when the builders will get this certificate they will give us the possession of the house and that is what I understood from what builder explained me while I was buying the house. Now I feel like I am cheated. I don’t know what to do next. I want to take legal action against them for misguiding me. Please help me. My email address is singh.vijaysagar7@gmail.com. Thank you.

  19. Hi, My home loan has been sanctioned and the Bank says they have disbursed the initial amount (85%), but they did not make the payment to the builder until registration. I have taken a month to register my property, but Bank has started my Pre-EMI even before the actual payment to the builder. Is this correct? As a lay man, I feel the money is still with the bank until the payment is made. why are we charged for that period without even releasing any amount?

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