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Tata Capital > Blog > Loan for Home > Pre-EMI vs full-EMI: Which is the right choice for you?

Loan for Home

Pre-EMI vs full-EMI: Which is the right choice for you?

Pre-EMI vs full-EMI: Which is the right choice for you?

Buying a house often involves taking a home loan, and one of the most important aspects to consider is the repayment method. Equated Monthly Installment (EMI) is the fixed amount a borrower pays every month to repay both the principal and interest on the loan.

Lenders offer two repayment options for under-construction properties, including pre-EMI and full-EMI. Understanding the difference between these two is crucial, as it directly impacts your monthly budget, total interest cost, and long-term financial planning.

This guide explains the pre-EMI meaning, what full-EMI is, its key differences, pros and cons, and which one may suit your financial situation best, helping you make a smarter home loan decision.

What is pre-EMI?

Pre-EMI is a repayment method that home loan borrowers can choose to clear the loan. It focuses on repaying only the interest component initially, with no contribution toward the principal component.

Borrowers can opt for the pre-EMI option when the property is in the construction phase. The monthly payout in pre-EMI is less than full-EMI since the principal component is not included. You will need to pay the EMI in full, including the principal and interest, after your home’s construction is complete.

Housing loans for under-construction projects are released in stages linked to the construction progress. Thus, the borrower is liable to pay interest only on the disbursed amount, not on the total sanctioned amount.

Pre-EMI repayment has a lower initial monthly outgo, making it an ideal choice for borrowers who must also pay rent or manage other expenses. However, as there is no reduction in principal during this period, there is an increase in total interest outgo in the long run. Additionally, tax benefits on pre-EMI interest are available only after property possession.

What is full-EMI?

A full-EMI refers to the regular Equated Monthly Installment (EMI) paid towards a housing loan. It includes interest and principal components. Borrowers must start paying it after the entire loan is disbursed and the property’s construction is completed. The full-EMI amount is much higher than pre-EMI because it includes both the principal and interest.

Full-EMI begins the complete repayment process early, ensuring that the loan principal starts reducing immediately. Its tenure is also relatively shorter than pre-EMI. Generally, this option is preferred by borrowers who can afford higher monthly outflows and want to minimize total interest costs over the loan tenure.

Let’s understand more about pre-EMI vs full-EMI with the help of an example.

Suppose you take a home loan of Rs. 50 lakh for an under-construction apartment. Under pre-EMI, you are liable to pay interest only on the disbursed amount, say Rs. 25 lakh, until possession. However, if you choose full-EMI, you’ll start repaying the principal and interest component on the entire amount of Rs. 50 lakh immediately, resulting in an increased monthly outgo. Full-EMI helps you save significantly on long-term interest and reduce the loan tenure.

Pre-EMI vs full-EMI: Key differences

The following table highlights the differences between pre-EMI and full-EMI, which you must understand before opting for a home loan repayment option.

AspectPre-EMIFull-EMI
MeaningPre-EMI refers to interest-only payments made on the disbursed loan amount during the property’s construction phaseFull-EMI includes both principal and interest components, starting from the first disbursal of the loan
When applicableApplicable for under-construction properties where the loan is released in stagesUsually begins after full loan disbursal or when the borrower opts for it, even during construction
Monthly paymentLower, as only interest is paid on the amount disbursedHigher, since it covers both principal and interest
Impact on principalPrincipal remains unchanged during the pre-EMI periodPrincipal starts reducing immediately with every payment
Total interest outgoHigher, since repayment is delayed and interest continues to accumulateLower in the long run, as early repayment reduces the interest burden
Tax benefitsAvailable only after possession, in five equal installments over subsequent yearsAvailable immediately under Sections 24(b) and 80C, depending on interest and principal paid
SuitabilitySuitable for buyers needing short-term relief or those paying rent alongsideBest for borrowers who can afford higher EMIs and want faster repayment
Long-term financial impactIncreases overall loan costReduces total interest and helps build equity faster

When to choose pre-EMI or full-EMI?

Choosing between a home loan pre-EMI vs a full-EMI depends on an evaluation of your current financial condition, risk appetite, and objectives. The scenarios in which you should opt for either are as follows:

Pre-EMI:

  • If cash flow is tight during construction, and effective management of funds is required to maintain financial stability
  • If a longer loan tenure is more comfortable, and paying slightly higher interest rates in the long run to keep the immediate financial burden low is preferred
  • If the project’s construction is expected to reach completion within the estimated timeframe, and there is little chance of extension of pre-EMI payments

Full-EMI:

  • If you want a lesser total interest outgo
  • If you have sufficient financial resources to clear higher EMI payments from the start
  • If you wish for a shorter loan tenure to become debt-free sooner, and enjoy greater financial flexibility

Pre-EMI and full-EMI suit different borrower profiles. You must assess your cash flow requirements and financial objectives and consult a lender before choosing between the two repayment methods. Your entire home loan experience and the total cost of purchasing property are affected by your choice.

Tax benefits of pre-EMI vs full-EMI

There is no difference between pre-EMI and full-EMI in terms of tax benefits. During the property’s construction phase, you are not eligible for any deductions. However, once you have taken possession, tax deductions can apply to the interest payments made under both pre-EMI and full-EMI repayment options. The total interest outgo is calculated by adding the interest paid so far. It is then deducted in 5 equal installments under Section 24 in the next 5 financial years.

Section 80C promises tax benefits on the repayment of the principal amount for up to Rs. 1.5 lakh per year. Section 24 offers tax deductions on the interest paid and is limited to Rs. 2 lakh per year for a self-occupied residential property. These limits don’t apply to properties let out on lease or rent.

Since pre-EMI and full-EMI don’t differ significantly in tax benefits, you don’t need to compare the two on this aspect before selecting.

Pros and cons of pre-EMI vs full-EMI

Borrowers can choose between pre-EMI and full-EMI repayment options when taking a home loan for an under-construction property. Each one has its distinct advantages and disadvantages.

Pros of pre-EMI

  • Lower monthly outgo: Pre-EMI requires repayment of only the interest component of the loan until possession, thereby reducing the monthly outgo. This is beneficial if you’re also paying rent or managing other expenses.
  • Flexibility: The plan allows flexibility during the construction phase when your income stability may not be certain.

Cons of pre-EMI

  • Higher interest in the long term: In the pre-EMI plan, principal repayment doesn’t start immediately, making the total interest outgo higher.
  • No tax benefits: You cannot claim any deductions on pre-EMI interest until possession.

Pros of full-EMI

  • Builds equity early: Full-EMI makes you start loan repayment early. As a result, you build home equity faster.
  • Saves total cost: Full-EMI includes both principal and interest, reducing the total interest payable over the tenure.

Cons of full-EMI

  • Higher short-term burden: Full-EMI requires a higher monthly outgo during construction, which can strain finances in the short term.

The pre-EMI option is ideal if you want to have a low financial burden initially. On the other hand, opt for the full-EMI repayment method if you want to finish the loan soon.

Conclusion

Pre-EMI and full-EMI are two popular types of home loan repayment plans. Understanding the difference between pre-EMI and full-EMI can help you better manage your finances when you purchase a home. The pre-EMI option is ideal if you want to have a low financial burden initially. On the other hand, opt for the full-EMI repayment method if you want to finish the loan soon.

Tata Capital offers pre-EMI and full-EMI repayment options to suit the financial preferences of different borrowers. Use the EMI calculator to compare pre-EMI vs full-EMI and choose wisely.

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FAQs

What is the difference between pre-EMI and full-EMI?

Pre-EMI refers to the interest-only payment made on the disbursed loan amount during the construction phase of the home. The repayment for the principal starts only after possession or full disbursal. On the other hand, full-EMI includes both principal and interest payments from the beginning. Pre-EMI keeps the initial outflow low, but it doesn’t reduce your outstanding loan balance. Conversely, full-EMI may be costlier initially, but it helps you start loan repayment early and reduce interest burden over time.

Which is better: Pre-EMI or full-EMI for a home loan?

The better choice between pre-EMI and full-EMI depends on your financial situation. Pre-EMI is ideal for you if you want to reduce your monthly expenses while your property is being constructed. It offers short-term relief but increases total interest expense. Full-EMI is better if you can afford higher payments early, as it helps reduce the principal faster and saves interest in the long run. Full-EMI is generally the smarter choice for long-term financial stability.

Can I change from pre-EMI to full-EMI later?

Yes, most banks let borrowers switch from pre-EMI to full-EMI once construction reaches a significant stage or after full loan disbursement. To initiate the process, you’ll need to submit a formal request to your lender.

Switching to full-EMI early helps start principal repayment sooner, thereby reducing total interest costs. However, once you opt for full-EMI, you can’t revert to pre-EMI. It’s best to make the switch when you’re financially comfortable managing higher monthly payments.

Are there tax benefits on pre-EMI payments?

Pre-EMI interest payments do not qualify for immediate tax benefits under Section 24(b) of the Income Tax Act. However, the total pre-EMI interest paid during the construction phase can be claimed as a deduction in five equal installments after the property’s possession. You cannot apply for a deduction for the principal portion until construction is complete. Pre-EMI offers temporary payment relief. However, you cannot enjoy tax benefits as early as you can under a regular EMI structure.

Is pre-EMI good or bad for long-term loans?

Pre-EMI can be convenient for short-term financial flexibility, but it is not ideal for long-term loans. Since the plan only involves interest payments during the construction period, the principal remains unchanged, resulting in a higher overall interest expense. Opting for full-EMI helps reduce the principal balance sooner and saves on interest for long-term borrowers. On the other hand, pre-EMI helps borrowers manage finances if they are paying rent.

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