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Pre EMI vs full EMI

Pre EMI vs full EMI

Buying a home is a dream nurtured by everyone. It takes years of savings for one to become a home owner. Despite the savings, it is not always possible to buy your dream home outright thanks to the ever-escalating rates of real estate. As such, most people have to rely on home loans in order to purchase a house.

Home loans are offered by banks, non-banking finance companies and housing finance companies. A borrower can repay the home loan by paying Equated Monthly Instalments or EMI, which comprise of the principal loan amount and the interest rate. The interest rate is determined on the basis of the loan tenure and one can take a home loan lasting for as many as 20 years.

There are two different types of EMI repayment schedules offered with home loans; pre EMI and full EMI. In this article we shall understand what is Pre-EMI vs full EMI and what makes the two EMI payment methods different.

What is Full EMI?

A Full EMI is the EMI amount paid by the borrower right after the principal loan amount is first disbursed; even if it is disbursed in parts. This simply means that the borrower pays the monthly EMI as per the actual loan amount sanctioned and not just the disbursed amount. Let’s look at it with an example.

Let’s say, your lender has sanctioned a loan amount of ₹50 lakhs for an under-construction property on which your home is being built. Now, the builder needs the first instalment towards construction and you take a disbursement of ₹5 lakhs for the first tranche. Although your lender disburses only ₹5 lakhs, if you opt for full EMI, you have to pay the EMI on the entire loan amount of ₹50 lakhs.

So, if your home loan is offered at a 10% interest rate, for a period of 20 years, you would be paying a monthly EMI of ₹48,251 on a loan amount of ₹50 lakhs. The full EMI constitutes both, the principal and the interest portion. This EMI is paid despite borrower only disbursing 5 lakhs first, and subsequent instalments as the construction progresses, until the entire ₹50 lakhs are disbursed. Full EMIs can also be opted for under-construction properties.

What happens in case of a full EMI?

Even if your entire loan amount is disbursed in one go, there is essentially no difference as the sanctioned and disbursed amount would be the same. However, if the loan amount disbursed is lower, you end up repaying your loan much faster. This reduces your overall interest outgo considerably. So, if you choose not to seek disbursement of the entire loan amount sanctioned, then you lender will simply readjust the tenure of your loan. For instance, if you take ₹20 lakhs as your first disbursement amount, and choose not to take any further disbursements, then you can repay your home loan in just 52 months instead of 240 months for 20 years tenure.

What is Pre EMI?

Before we go into a comparison of EMI vs Pre EMI, let’s understand what is Pre EMI?

Pre EMI is applicable only for under- construction properties. Until the entire sanctioned loan amount is not disbursed, the borrower pays only the interest on the amount disbursed. Principal amount repayment doesn’t begin until the entire sanctioned amount is disbursed. The borrower can begin paying off EMI as per the regular amortization schedule after the entire loan amount is disbursed. Most lenders allow pre EMI payment only up-to 3 years, after which you need to pay full EMIs.

What happens in case of Pre EMI?

In case of Pre EMI, disbursements are made in tranches. Let’s continue with the above example where your sanctioned loan amount is ₹50 lakhs, and your first disbursement amount is ₹5 lakhs. In this case you will pay ₹4,167 as pre EMI (₹5 lakhs x10%/12). Now, let’s say you take the next disbursement after 6 months of ₹10 lakhs, then your Pre EMI increases to ₹12,500 (₹15 lakhs x10%/12) and so  on.

Your actual EMI (principal + interest) begin only after the final disbursal.

Difference between full EMI and Pre EMI

Now that we know how full and Pre EMIs work, let’s do a comparative analysis of pre EMI vs full EMI.

Disbursing the loan – If you choose the full EMI option, the entire loan amount is usually disbursed in one go as opposed to Pre EMI where the loan amount is disbursed in parts.

Loan repayment – Choosing the full EMI option allows you to repay your debt faster since your monthly instalments are composed of both principal and interest, as opposed to pre EMI where you pay only the interest component until the entire loan is disbursed.

Interest rate – The interest rate on full EMI is calculated as per the principal loan amount versus pre EMI where the interest is compounded as per loan amounts disbursed.

Payment of EMIs – In case of Pre EMI, EMI payments begin when construction begins, whereas for full EMI, you can begin paying EMIs after construction is completed and you have gotten possession of your property

Tax benefits of Pre EMI vs full EMI

Whether you opt for pre or full EMI, there aren’t any changes for tax deduction. A borrower cannot take advantage of tax deduction until property construction is completed. When construction is completed, the interest paid on home loan pre construction, may be aggregated and deduction can be done in five equal instalments, from the time construction was completed.  Tax deductions do not apply on principal amount paid on full EMIs during construction. Interest can be claimed by the buyer on Pre EMI as deduction, after construction is completed.

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