In pre-EMI mode of repayment, the financer will disburse the loan as per the construction stage of the home/ building, as agreed by the borrower.
The interest amount will be paid in partial disbursements during the course of construction. After the construction is completed, the borrower will have to pay regular EMI.
Pre-EMI is repayment of interest on loan only whereas EMI is the repayment of principal loan amount and interest applicable. When a home loan borrower chooses the pre-EMI mode of repayment, he/she will have to pay the interest on loan until the construction of the house is completed.
EMI will have to be paid once this is done. Pre-EMI mode assures lower outflow of cash compared to regular EMI. This mode can be chosen also when the borrower does not have enough income capacity to pay the monthly EMIs.
Mr. B takes a home loan for 20 years. He chooses the pre-EMI method and pays it until construction is completed. The construction of his house is completed in 5 years, so he pays pre-EMI for 5 years. EMI payments would start from this time for a 20 year tenure. The total payment will be for a period of 5 years + 20 years.
Borrowers who have cash flow issues and are not able to repay the loan EMIs at present, can opt for the pre-EMI option. Customers do not have to wait till the entire loan amount is disbursed. He or she can start repaying the interest on the loan amount availed using the Pre-EMI option before the total amount has been disbursed as well. Customers can also choose to switch from the Pre-EMI stage to the EMI stage mid-term before the possession. This should be done when 70% to 75% of the loan has already been drawn.
See the formula mentioned below to calculate the Pre-EMI of your loan amount:
[P X r X (1+r) ^ n]/ [(1+r) ^ n-1]
Here,
P is the principal or total loan amount
r is the rate of interest per month
n is the total number of installments
The Pre-EMI option is an additional benefit wherein the borrower can repay the interest amount of a loan without having any impact of the loan tenure and amount. Therefore, this facility should be used wisely. Before availing this option, customers should consider the points mentioned in the list below in order to avoid any bad debt and additional payments.
The pre-EMI option on a home loan is only available for property that is under construction.
The pre-EMI option is typically available for up to 36 months. The construction of the property has to be completed within this time period.
When you choose the pre-EMI option on a home loan, you only have to pay interest on the amount that has been disbursed and not on the entire principal amount.
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