One fine morning you wake up to read the newspaper and found pamphlet advertising – buy a luxurious apartment & captioned in bold “EMI starts only on possession”. You are happy to read and consider this as an opportunity to save money thinking this is a flexibility offered by the lender. The advertisement tactics is so impressive that with thrill and enthusiasm you ring on the contact number mentioned on the pamphlet – only to thereby learn about Pre-EMI.
Pre EMI is generally associated with under construction properties. In pre EMI you pay only the interest on the partial disbursements of your loan amount. The EMIs paid using the Pre-EMI option do not have any impact on your principal amount, loan repayment tenure, or rate of interest. The pre-EMI period is not part of your loan tenure. For instance, if you opt for a loan on under construction property whose procession is in 3 years with the loan tenure of 20 years and you go for pre EMI option, your total loan tenure would be 3 years (pre-EMI period) + 20 years (loan tenure) = 23 years.
However you get the liberty to switch the repayment mode any time prior to possession. If you think you are comfortable paying the EMIs you may choose to shift from Pre-EMI to EMI anytime in the mid-term before taking the possession of the property.
Pre-EMI is Suitable:-
1) If you have interrupted flow of funds and cannot afford to pay loan principal. You can opt for paying Pre-EMI till you start affording paying full EMI.
2) If you want to sell the property immediately after taking the possession of the same. Pre EMI can be an ideal option for property investors who wish to sell the property once construction is completed.
3) If you wish to same money during the pre-EMI period and invest it elsewhere to earn consistent returns. You may use the saved amount to pay EMI at a later stage.
4) If you are staying in a rental apartment and has less money to pay the rent as well as the loan repayment EMI.
5) If you want to reserve some funds for meeting emergency situations.
6) If you are facing any financial crisis and has an urgent credit requirement.
There is NO tax benefit in the Pre-EMI option. You do not get any advantage of tax deduction until you receive the possession of the property. However in the respect of interest paid for the period prior to the year of taking possession, you can claim aggregate of such interest in the five equal instalments from the year in which the construction is completed u/s 24(b) of the Indian income tax act under the head income from house property.
Although the option of pre-EMI reduces the burden on your pocket there are a few loopholes in it.
1) In pre-emi you are not allowed to pre close your loan or make any part payment to the loan account.
2) You are not allowed to balance transfer your existing loan with high interest rates to a new lender with low rates. Only when you start paying EMI after receiving the successful possession of your property you are able to transfer your loan.
3) Often in under construction disbursements, the lenders by default provide you with pre emi option without your consent. Therefore it is important that you know the terms and conditions of the lenders prior hand. Also ensure you read carefully the docket kit for disbursement before making blind signatures and tick mark the appropriate option suitable for you if the lender mistakenly overlooks the same.
4) In case there is a delay in possession or completion of the project, you need to pay pre-EMI unnecessarily.
It is therefore important that you wisely choose between Pre-EMI and Full EMI option while choosing a lender with nominal home loan interest rates to fund your under construction property.
On the other hand the term Pre EMI can also be explained with reference to the cases disbursed before the EMI date. Explained ahead:-
You are required to choose an EMI date for the automatic debit of your monthly EMI outgo from your linked bank account. EMI dates are generally 1st, 5th or 10th of every month. You need to choose a date of your comfort for your automatic deduction of EMI. For instance, suppose your case is disbursed on 25th of the month and you choose 5th as your EMI date then from 25th – 5th you have to pay the pre EMI i.e. you need to pay interest for the said period on the total amount of loan disbursement.
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