Owning a decent house is everyone's dream. For some people, it's a lifetime goal. With the sky-high prices of real estate, it is not an easy thing to either purchase or to construct a house. One has to shell out a huge amount to acquire a property/house in this era. So, it is an ideal decision to go for a home loan apart from pooling in your saved money for purchasing your dream home.
So, if an individual borrows money from a bank to purchase a house which is under construction, then they may not notice whether the repayment mode is an equated monthly instalments (EMI) or a Pre - EMI.
Let's understand in brief about the concept of Pre - EMI.
What is Pre - EMI?
The term Pre - EMI, refers to the instalments which precede the actual equated monthly instalments. A Pre - EMI is the repayment of the interest amount on loan and there will be no contributions made towards the repayment of the principal amount.
This Pre - EMIs will usually be paid until the full disbursement of the loan is done and is exclusively available only for home loan applicants.
The Pre - EMIs will be lower when compared against the normal EMIs.
As per the Pre - EMI, the borrower will be availed only a part of the loan and in turn, the borrower will have to pay the bank only the interest on the amount disbursed until the full loan amount is availed. The interest paid by the borrower is known as Pre - EMI interest or PEMI. This interest amount is payable every month until the final disbursement is made, post which the regular or normal equated monthly instalments (EMIs) will begin.
Mr Skanda has applied for a home loan from a bank for construction of the house. The bank will disburse the loan, based on the construction of the house, as agreed by Mr Skanda. The interest amount will be paid in partial disbursements during the tenure of construction of the house (this is Pre - EMI).
Once the construction is completed, Mr Skanda will have to start paying regular EMI amount to the bank.
Who all can apply for Pre – EMI?
- Individuals who have cash flow problems (issues) and are not in a position to repay the loan's equated monthly instalments can apply for Pre - EMI.
- Customers need not have to wait until the complete loan amount is disbursed by the bank.
- Borrowers can start repaying the interest on loan amount used by them using the Pre - EMI option even before the total loan amount has been disbursed.
- Banks do provide an option for borrowers to switch from Pre - EMI stage to EMI stage ahead of the possession, this can be done when 70 per cent - 75 per cent of the loan amount has already been drawn.
When to opt for Pre – EMI Option?
- The Pre - EMI option can be chosen by the borrower when they face any of the below-mentioned circumstances
- When the fund flow is less and borrower is not able to afford to pay the EMI.
- When there is an emergency credit requirement and borrower want to save some money for that.
List of Factors to Consider Before Opting Pre – EMI Option
A Pre - EMI option is an additional benefit rolled out by banks to the borrowers who can repay the interest on loan without having any further implications on the loan amount and its period and hence this facility should be utilized properly.
Before choosing a Pre - EMI option, borrowers should consider the following list of factors to evade additional payments.
- The borrower should take into account as to how much ability they have to repay the debt.
- Compare and check other investment options and find out, if they can get better returns from them.
- Evaluate the purpose of the product purchased using the loan.
- Analyse if the borrower will be capable of repaying the EMI apart from handling additional expenses (if any).
- Investigate, whether the property will be used for personal purpose or will be sold to someone else post-construction.
- Calculate the total opportunity cost which you are preparing to save.
- To verify, if there will be any returns from the purchased element.