Pre EMI Interest vs Full EMI Home Loan | Hindi - YouTube

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Namashkar, my name is Mukul and welcome to Asset Yogi

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Let's say you want to invest in an under-construction property and you want to

borrow a home loan for it

Then generally, the banks give you 2 options

Pre EMI and Full EMI options

What is the Pre EMI option and how it is different from the Full EMI option?

And should you opt for Pre EMI option or not and if yes, then in which cases

We're going to discuss all these points in detail in this video

So stay tuned with this video till the end

As always, let's switch to the blackboard

To understand the Pre EMI, let's take an example

Let's say this is an under-construction property in which you've invested

and let's say the time period of construction is 12 months

Generally, it is 2-3 years but in our example, we've assumed 12 months for a better understanding

So in this, let's say you took a loan of Rs 36 lakhs for buying this property

The total cost of the property is Rs 45 lakhs

Pre EMI option is only available in the case of under-construction property and not in the case of ready to mover property

So let me write it down here

Now let's get back to our example

So you borrowed a loan of Rs 36 lakhs at an interest rate of 8.5% per annum

And let's take the tenure of 20 years

So now you have 2 options.

1. To pay the Full EMI

If you will pay the Full EMI the EMI becomes Rs 31,242

For this, I made an EMI calculator and I also made a video on it

You can watch that video and you can download that EMI calculator as well

So if you will check out my EMI calculator, you can easily find out this EMI

which is Rs 31,242

With that, the total interest payable after 20 years comes out to around Rs 39 lakhs

You can also calculate this very easily with the EMI calculator

So if you choose the option of Full EMI

Then you will start paying Rs 31,242 right from the day 1

But in the Pre EMI option

If I assume the Pre EMI interest rate, it is around 0.71%

So for 0.71%, I divided 8.5 by 12

So let me write here 8.5%/12 = 0.71%

Now let's see how the payment is done in the Pre EMI option to the builder

and how the Pre EMI starts

So I made this Amortization schedule

Let's say the construction period is 12 months and you pay Rs 3 lakhs every month

Let's say you have to pay Rs 36 lakhs to the builder

Out of 45 lakhs, let's say you did a downpayment

Downpayment of Rs 9 lakhs

So we assumed that you did a downpayment of Rs 9 lakhs through your own sources

And after that, you took a loan of Rs 36 lakhs and now slowly the payment will go off

Let's say it's Rs 3 lakhs per month

Rs 3 lakhs per month are going, right!

I've written the total disbursement in this column

So Rs 3 lakhs in the first month, Rs 6 lakhs till the 2nd month

Rs 9 till the 3rd month, 12, 15, and so on..

So this is the total disbursement

So in the pre-EMI option, you only pay the interest

And interest is also the Simple interest

Simple interest only. Let me write here.

So if Rs 3 lakhs are gone in the first month then simple interest will be calculated on Rs 3 lakhs

That will be 0.71%

Rs 2125 for Rs 3 lakhs

After that on Rs 6 lakhs, it is Rs 4250

In this way, the pre-EMI of Rs 25,500 will start going on Rs 36 lakhs

So this is your pre EMI till the last

So this was your 1st pre-EMI, this one was the 2nd, 3rd and in this way, this is your 12th pre-EMI

So if you will calculate the amount of the total pre-EMI then the final amount will be Rs 1,65,750

So how much total interest do we pay in pre-EMI in one year

Rs 1,65,750

Now if we have to find the total interest payable for 21 years

Then it will be the full EMI which you have to pay for 20 years + this

So how much will be the total amount?

Rs 40,63,743. Right!

So this is 1 + 2

So in the case of pre-EMI, you'll pay more interest rate

Let me explain graphically

In the case of pre-EMI

the time till when the construction is going on. Let's say this is the 1st year

This is the 0 date, alright!

This date is after 1 year and in between, you paid pre-EMI

After that, the countdown for 20 years will start again

Here you have to pay the full EMI

This was the case of pre EMI but

If you would have paid the EMI directly

Then from day 0 till 20 years which would have ended here

You would have to pay the full EMI

So your loan amount would have ended in 20 years but in this case, it will go till 21 years

So 20 years are these and 1 years from here. So that's why you'll do the repayment till 21 years

So 1-year pre-EMI interest rate is additional

That's why you are paying an additional interest rate

So let's see what are the advantages of pre-EMI and in which case you should opt for it

and what are the benefits of EMI

So if you want to choose the pre-EMI then in which case should you choose

If you don't have money in the initial years

Let's say you are living on rent and you are paying a rent of Rs 20,000 per month

In the first case, if you will calculate the average of pre-EMI then you might have seen that you were paying Rs 2500 in the starting

So 2500 + the outflow of Rs 22,500

Gradually, the pre-EMI will keep on increasing

and it will become Rs 45000 finally when you'll pay the last.

We saw 25000, right!

So the final pre-EMI was around Rs 25,500

and the total outflow will be around Rs 40,000-45,000

But if you would have opted for the full EMI, you would have to pay Rs 20,000 + Rs 31,000 EMI from day 1

And the outflow would have been Rs 51,000 in case of full EMI

So if you opt for pre-EMI then the outflow will be less

If you have a limited budget and you live on rent then pre EMI option will be better for you

And when you will move in, the rent will get completed and the full EMI will start

Another reason is, if you've invested in an under-construction property

Then maybe you want to sell it till possession

In that case also, the pre-EMI option makes sense

because you don't want to lock your money and it is just for the investment purposes

So you can definitely go with the pre-EMI option

After that, the difference between EMI and pre EMI

As we saw earlier, if you are paying an EMI of Rs 31,242 every month

Let's say you're paying an EMI of Rs 31,242 for 12 months

So how much is your total amount?

Rs 3,74,904. Right!

But if you pay pre-EMI, in that case, the total was around Rs 1,65,000

Rs 1,65,750. Alright!

Now the difference is around Rs 2 lakhs

If you can invest these Rs 2 lakhs

And let's say if you can invest it at more than 8.5%

So if you can earn more than the interest of the home loan (8.5%) through any investment

Then you should invest this money there

And you can choose pre EMI in that case as well

But for most of the people, this becomes a headache and the salaried class people don't have this much time

So definitely, if you can afford the EMI option then you should go with it

After that, if you need extra cash immediately for any medical emergency or if you want to buy any vehicle

or any other requirement then the home loan is cheaper and you can choose pre EMI option for that as well

After that, when should you choose the option of full EMI?

If you can afford it then definitely you should choose the option of full EMI

because you want to repay your loan as soon as possible

Because it is not possible for everyone to be investment savvy and

to get more returns than the interest rate because

You'll always get the rate of FD less than the home loan interest rate

So if the construction is delayed

Let's say instead of 2 years, it's 3-3.5 years

so the interest amount will keep getting accumulated and the interest will increase

In that case, it is better to start with full EMI as soon as possible

And as I said earlier, if you cannot get more returns

and if you get less than 8.5% returns in any other investment

Then it's better to pay the full EMI and repay the home loan as soon as possible

Now let's see the tax benefits in EMI and pre EMI

Actually, the tax benefits of both are similar

You get tax benefits on a home loan under Sec 80C

Under Sec 80C, there's a benefit of Rs 1.5 lakhs as of FY 2017-18

You get up to Rs 1.5 lakhs deduction but

But this benefit is not available in the construction period of EMI or pre EMI

So the benefit of the principal repayment starts after the possession

Whether in the case of EMI or in case of pre-EMI

After that, in section 24, you get benefit on the interest paid

And how much is that?

Rs 2 lakhs per annum. Let me write it here

Loss from property

So due to the loss because of interest every year

In that, you can claim an interest deduction of Rs 2 lakhs per annum under loss from property

And how can you do this?

The interest portion accumulated during construction

Can be claimed in 5 equal instalments for the next 5 years after possession

Note the word possession here

So after possession, you can claim Rs 2 lakh benefit every year for 5 years

So it is applicable in the case of EMI and pre EMI

So the tax benefits in both the cases are similar

So I think I covered all the major points on pre-EMI

What exactly pre-EMI is and in which case should you opt for pre-EMI

and in which case should you choose the full EMI

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