Mr. Sharma is planning to buy a house but is facing a serious dilemma. He wants to take a home loan for a house that is still under construction and has the concerns of facing liquidity crunch while paying full EMI along with the rent of his existing house.
What should Mr. Sharma do?
Mr.Sharma has three options of repayment. Lets have a look.
When you’re buying a house which is under construction, the payment is linked to the progress of construction by the developer. If you want to take a home loan for buying it, your bank also links the disbursement with the stage of construction as per the flat-buyer agreement or provisional allotment letter. In such cases, you will either be asked to pay pre-EMI or given an option to choose between pre-EMI and full EMI payments. There is another repayment option available which is usually not known to you or the bank’s loan officer may not have discussed it with you. It is called Tranche-EMI. Lets dig into this further and analyse the best option for repayment of your Home Loan.
What is a Pre-EMI?
Where you have availed disbursement of only a part of the loan, you would be required to pay only the interest on the amount disbursed till the full loan is availed. This interest is called pre-EMI interest (PEMI) and is payable monthly till the final disbursement is made, after which the EMIs would commence. On the face of it, sounds lucrative as it would be a lot less than paying the full EMI.
In the case of pre-EMI option, you will pay only the interest component till you get possession. Assuming that the developer takes three years to hand over the house and the loan tenure is 20 years, you will actually repay the loan for 23 years. So the lenders are happy if you opt for a Pre-EMI.
What is a Full-EMI?
With some banks you have an option to pay full EMI even when the disbursal is being done in stages. If you choose ‘EMI under construction’ option, you will start paying EMI from the beginning of construction, but your interest amount will be calculated based on the amount disbursed and the rest of the amount will be adjusted towards principal. i.e., EMI remains the same but the principal portion of the EMI would be higher and loan gets repaid quickly leading to savings on interest cost.
This option is suited for those having high disposable income and wish to repay the loan faster, thereby reducing their interest cost.
What is Tranche-EMI?
Whether you are an investor or an end-user of property, Tranche based EMI is one such innovative repayment plan, which is suitable for all borrowers as it allows you to start paying EMI on the partially disbursed amount and continue to pay till the property is ready and then regular EMI starts.
This situation is beneficial for those borrowers, who are not in a position to pay a large amount(Full-EMI) in the beginning, but expect that their salary levels will rise in near future and they will be able to sustain the payment of the EMI amount or they are residing in a rented house while waiting for property possession and cannot afford to pay both rent and full EMI at the same time.
Tranche based EMI is not offered by all the lenders and financial institutions, for this reason you need check with the lender before applying for a home loan.