Disbursement in an under-construction property: pre-EMI

Pre-EMI is applicable when the loan is disbursed for an under-construction property. Disbursement in under-construction property means when you apply for a loan for a property that is still being constructed by the developer, the bank pays the money to the builder according to the finished work, and not the whole principal amount.

What is the benefit of getting a loan for an under-construction property at pre-EMI?

Many homebuyers prefer to buy an under-construction property instead of buying a house or an apartment that is fully constructed.

Under-construction properties are priced at least 20% lower than ready-to-move-in properties. In fact, with pre-EMI lower than the conventional EMI, it is a much more economical way of buying a house.

Even if that is not the case, many homebuyers invest in under-construction properties through pre-EMI for capital growth. They buy the property at lower rates and when all the properties in the locality are fully constructed, they sell the house at a higher value.

Also, since the disbursement of the amount is dependent on the work done by the builder, it also acts as a motivation for the builder to complete the project on time – he won’t get the next payment unless a certain stage of the construction work is completed.

Difference between full EMI and pre-EMI

When you take a home loan, you pay the interest on the amount that is sanctioned to you. For example, if you take a loan of ₹ 50 lakhs with full EMI, you pay interest on the entire amount whether it is disbursed to you or not.

What is the difference between sanctioned amount and disbursed amount?

Sanctioned amount is the overall money that you are allowed to take from your loan – the upper limit. For example, if you have been sanctioned ₹ 50 lakhs, then this is the upper limit you can take from the bank. The disbursed amount is the actual amount that comes to your bank that you can use.

When you take a loan for an under-construction property the loan is often disbursed in phases and the amount is paid directly to the builder.

Full EMI means that you pay the interest and the part of the principal on the entire sanctioned amount. If the sanctioned amount is ₹ 50 lakhs, then you pay the EMI based on those ₹ 50 lakhs, no matter how much money has been paid to the builder by the bank or the creditor.

Sometimes the entire amount is disbursed (the entire ₹ 50 lakhs to the builder) and sometimes it is disbursed in phases. Irrespective of that, you pay the full EMI.

The full EMI option is available to you whether the disbursed amount is complete. This is in possession of the house. It mostly commences when the construction of the house or the apartment is completed. The benefit of paying full EMI is that the overall money that you need to pay gets reduced and the money that you owe to the bank or the creditor is repaid faster because you are paying both the principal and interest.

Pre-EMI is available only for under-construction properties, not for Ready to Move-In properties. That is, you pay pre-EMI till the house is being constructed. You pay interest only on the disbursed amount. There is no principal repayment. Once the entire amount that was sanctioned is disbursed, you begin to pay back the principal amount too, but until that happens, your pre-EMI consists of just the interest on the disbursed amount. You begin to pay the full EMI when the pre-EMI phase has ended.

One of the biggest benefits of opting for pre-EMI is that initially, you don’t need to pay a lot of money. The amount of monthly payment that you make to the bank consists of just the interest on the amount that the bank has disbursed. The pre-EMI period is not a part of the loan tenure.

Suppose you have taken a loan of ₹ 50 lakhs from a bank at a 6.7%per annum interest rate (hypothetical). Out of the 50 lakhs sanctioned, the bank disburses ₹ 6 lakh to your developer. Since under pre-EMI you are paying just the interest on the amount that has been disbursed, every month you will be paying

₹ [6,00,000 x 6.7/100] / 12 = ₹ 3,350

Conclusion

Should you go for pre-EMI? The burden, in the beginning, will be reduced because you will just be paying interest on the amount that has been disbursed, but your total tenure will increase because your actual EMIs begin when the construction is completed. The principal amount remains intact. It means when you start paying your EMIs, you will again be paying for the entire principal amount. Thus the decision should be solely based on your cash flow.