Purchasing a home, especially a piece of property that has not yet been constructed, is typically associated with various aspects of loan terms, such as pre-EMI. While many people know about EMI (Equated Monthly Instalment), few know about Pre-EMI. The purpose of today’s blog post is to identify the aspects of Pre-EMI, how it’s calculated, pros and cons, and how it compares to Full EMI.
What is Pre-EMI?
Pre-EMI refers to the interest that a borrower pays on the loan amount that was disbursed to them before they begin paying their EMIs. This mode of repayment is mainly utilized in cases of under-construction properties where the total amount of the loan is disbursed in parts depending on the state of construction. Unlike Full EMI, which has both principal and interest, the Pre-EMI is only the interest portion.
How Pre-EMI Works in Home Loans?
When you book a property in a construction stage, your lender disburses the home loan in tranches. You pay interest only on the portion of the loan that has been disbursed and not the total home loan that is sanctioned. The interest that you pay is called Pre-EMI, and this typically happens until the project is fully disbursed and completed. Once the property is ready for occupancy, the full EMI (including principal and interest) starts to take effect.
Difference Between Pre-EMI & Full EMI
The main distinction between Pre-EMI and Full EMI is whether you are paying interest only or both principal and interest each month. With Pre-EMI, you are only paying interest on the loaned amount that has been disbursed until you occupy the property. As a result, your payment at this point is lower. But you will not be applying for any principal payments in this phase.
Full EMI includes both principal and interest, so you will begin to pay your loan on the first day you pay. Full EMI payments will be higher at the start, but will result in less total interest paid over the term of the loan.
When is Pre-EMI Applicable?
Pre-EMI for Under-Construction Properties
Pre-EMI is mostly applicable to under-construction residential or commercial projects. Since construction may take several months or years, lenders allow borrowers to pay only the interest on the disbursed loan during this period.
Loan Disbursement & Pre-EMI Payment Timeline
- Loan sanctioned: Based on eligibility
- Loan disbursed in stages: As per construction milestones
- Pre-EMI starts: Immediately after the first disbursement
- Full EMI starts: After possession or full loan disbursement, whichever is earlier
Transition from Pre-EMI to Full EMI
The transition from Pre-EMI to Full EMI usually happens:
- On possession or registration
- After the final disbursement
- Or as agreed upon with the bank
At this point, the principal repayment begins, and the EMI amount increases accordingly.
How to Calculate Pre-EMI?
Pre-EMI is what you pay, only the interest, on only the disbursed loan amount during the construction phases of the property. You do not pay back any of the principal, unlike the full EMIs. To calculate your Pre-EMI, you use a simple Pre-EMI formula that is based on the interest rate, the disbursed loan amount, and your loan tenure.
Here is how you can work it out:
Formula:
Pre-EMI = (Loan Amount Disbursed × Interest Rate × Time) / 12
Where:
Loan Amount Disbursed = The portion of the loan released by the lender
Interest Rate = Annual interest rate (in decimal)
Time = 1 month (or applicable duration in months)
Example:
Suppose the bank has disbursed Rs 10,00,000 at an interest rate of 8% annually.
Pre-EMI = (10,00,000 × 0.08 × 1) / 12 = Rs 6,666.67 (monthly interest)
This Rs 6,666.67 is what your pre-EMI will be for that month. Pre-EMI will go up depending on how much has been disbursed at the time of construction – installments for pre-EMI will only be made as the bank disburses each portion of the loan.
Note: Pre-EMIs continue until the full loan amount is disbursed and EMIs (including principal + interest) officially start.
Step-by-Step Pre-EMI Calculation Example
Step-by-Step Pre-EMI Calculation Example
Let’s break down how to calculate Pre-EMI with a simple example:
Loan Sanctioned: Rs 40 lakhs
First Tranche Disbursed: Rs 10 lakhs
Annual Interest Rate: 9%
Step 1: Understand the Formula
Pre-EMI = (Disbursed Loan Amount × Annual Interest Rate) ÷ 12
Step 2: Plug in the Values
Disbursed Loan Amount = Rs 10,00,000
Annual Interest Rate = 9% (which is 0.09 in decimal)
Step 3: Calculate Monthly Interest
Monthly Pre-EMI = (Rs 10,00,000 × 0.09) ÷ 12
= Rs 90,000 ÷ 12
= Rs 7,500
Step 4: What This Means
You will pay Rs 7,500 every month as pre-EMI on the Rs 10 lakhs disbursed.
When the bank releases more funds (for example, the next Rs 10 lakhs), the Pre-EMI will increase accordingly because it is charged only on the amount disbursed so far.
So, as your loan gets disbursed in parts (tranches), your pre-EMI payments will rise proportionally until the full loan amount is disbursed and your regular EMI (including principal repayment) begins.
Factors Affecting Pre-EMI Amount
- Disbursed Loan Amount
Pre-EMI is calculated on the amount disbursed by the lender. As more of your loan is released in tranches, your Pre-EMI gradually increases.
- Interest Rate of the Lender
Since Pre-EMI covers only the interest, a higher interest rate means a higher monthly Pre-EMI. Even small rate changes can impact your payments.
- Duration Between Disbursement and Possession
The longer it takes to complete the property, the longer you’ll be paying Pre-EMI. Extended durations can increase your total interest burden.
- Number of Tranches and Timeline
Loans are disbursed in stages based on construction progress. Each tranche adds to the total disbursed amount, increasing your Pre-EMI over time.
- Loan Type (Fixed/Floating)
With fixed-rate loans, your pre-EMI stays stable throughout. In floating-rate loans, pre-EMI can rise or fall depending on market rate changes.
Pre-EMI vs Full EMI – Which One to Choose?
Pros
- Lower Monthly Outgo Initially
Since you’re only paying interest, your monthly burden is lighter compared to full EMI, which includes principal and interest. - Better Cash Flow Management During Construction
It helps you balance rent and loan payments if you’re still living in a rented home while your property is under construction. - Ideal for Investors Planning to Sell on Possession
Investors who intend to sell immediately after possession can avoid repaying the principal altogether, reducing upfront cash outflow.
Cons of Pre-EMI Payment Mode
- No Principal Repayment
Your loan amount stays the same during the Pre-EMI phase, which means no reduction in the actual debt. - Longer Loan Tenure May Increase Overall Interest
Delaying principal repayment can stretch your loan tenure and lead to higher interest payments over time. - No Tax Benefits Until Construction is Completed
You cannot claim deductions on Pre-EMI interest under Section 24(b) until the property is fully constructed and possession is taken.
Benefits of Paying Full EMI from the Start
- Early Start of Principal Repayment
Full EMI payments begin reducing your loan principal right from the start.
This helps shorten the overall loan tenure and builds equity in your home sooner. - Interest Outgo May Reduce Over Time
By starting principal repayment early, you reduce the outstanding balance faster.
As a result, the total interest paid over the loan’s life can be significantly lower. - Eligibility for Tax Benefits (After Construction)
Once the property is ready and possession is taken, you can claim tax benefits.
Deductions under Section 24(b) for interest and 80C for principal repayment become applicable.
Risks of Paying Full EMI from the Start
- Higher Monthly Burden During Construction
Full EMI means a higher outflow every month compared to Pre-EMI.
This can be financially stressful, especially when you’re not yet using the property. - Cash Flow Stress If You’re Paying Rent Simultaneously
Managing both rent and full EMI during the construction phase can strain your monthly budget.
This may reduce your flexibility to handle emergencies or invest elsewhere.
Financial Planning Considerations for Choosing Between Pre-EMI & Full EMI
- If Cash Flow is Tight, Go for Pre-EMI
Pre-EMI involves lower monthly payments, making it easier to manage expenses during the construction phase.
This is suitable for buyers who are also paying rent or have other financial obligations. - If You Aim for Faster Loan Repayment, Opt for Full EMI
Full EMI includes principal repayment from the start, helping reduce your loan balance early.
It’s ideal if you want to clear your debt sooner and reduce total interest payments. - Investors Preferring Resale at Possession Often Choose Pre-EMI
Since they don’t plan to hold the property long-term, investors benefit from lower Pre-EMI payments.
They can exit at possession without repaying much of the principal. - End-Users Planning Long-Term Stay May Benefit from Full EMI
Homebuyers intending to live in the house long-term can build equity faster with full EMI.
It also allows them to start claiming tax benefits sooner after possession.
Tax Benefits on Pre-EMI Interest Payments
You cannot assert tax deductions for pre-EMI interest immediately. After the construction is finished, you can then make a claim for the total Pre-EMI interest in five equal installments as per Section 24 (b).
Home loan repayments are eligible for tax benefits under two important sections of the Income Tax Act (Section 80C and Section 24(b)). The key point to remember is that the benefits will only be available after you have completed the construction of the property and are regularly paying full EMIs, containing both interest and principal. No tax deduction can be claimed immediately when you’re paying only the interest component during the pre-EMI period. Once construction is completed, here’s how each section applies:
- Section 24(b): Deduction available up to ₹2 lakhs/year towards home loan interest (after construction)
- Section 80C: Principal repayment deductions are only applicable after the EMI has commenced and not during the pre-EMI phase.
FAQs on Pre-EMI Payments
Can I Switch from Pre-EMI to Full EMI?
Many lenders will still allow you to switch from Pre-EMI to Full EMI during the construction phase. Simply request the switch, sign a few papers, and enjoy a new repayment plan.
What Happens If I Prepay the Loan During Pre-EMI?
While you can prepay your loan either partially or fully, you will have different outcomes. Your pre-EMI will just reduce your future EMI or potentially reduce your loan duration. Check with your lender to see if they impose a prepayment penalty as a term and condition of your loan.
Does Pre-EMI Affect My Loan Tenure?
Typically, the tenure will only start after the full EMI has started. However, since Pre-EMI does not pay any principal, the total interest will increase and affect your loan tenure.
Is Pre-EMI Beneficial for Short-Term Borrowers?
Yes, they are good for someone who plans to sell at possession, as it reduces their handover costs. But for someone with a longer-term goal in mind, the Full EMI is likely to work out better overall.
Pre-EMI is an advantageous repayment strategy for home loan borrowers who want to offload some of the financial burden being accrued during a home’s construction. Regardless of your decision to opt for Pre-EMI or Full EMI, you must understand the effect of Pre-EMI repayments on long-term interest outgo and tax benefits. Before selecting Pre-EMI, examine your current financial situation, intended goal for the future, and ability to cash flow the debt repayments.
