What is Pre-EMI, and how do you calculate it?

When it comes to buying a home, many people opt for a home loan. However, most people don’t know that home loan repayment can be made in multiple ways. You can choose between pre-EMI and full EMI options, depending on your preference.

When you take a mortgage, you likely get across the term "pre-EMI." But what does it mean? And how do you deal with it? This article offers an insight into pre-EMI, explaining everything there is to know about pre-EMI in India, specifically calculating the steps involved in this process.

What Is Pre EMI?

Pre-EMI stands for “Pre Equated Monthly Instalment”. This is the period before the Equated Monthly Instalment (EMI) on your home loan begins, and the borrower has to pay only interest on the amount borrowed so far. This they pay instead of repaying any portion of the principal amount.

For instance, suppose you take out a home loan from your bank or lender, but they give it to you in instalments, like when building your own house. Here, there might be no need for instant full payment of the EMI amount. So, you would only be required to pay interest on the portion of the amount disbursed.

Key Points about Pre-EMI

• During this phase, only interests are paid.
• No capital amount would be paid back.
• After the full disbursement of the loan sums, regular EMIs take over from pre-EMIs.

How does Pre-EMI Work?

In case of loan disbursement in parts for your own house, pre-EMI is paid for the amount released as part of the house construction. It is calculated on the disbursed amount quarterly and has to be paid monthly until you receive all the loan money.

Also Read: 5 Things to Consider Before Prepaying Home Loan

To understand it better, here is an example:

Suppose you have a home loan of INR 30 lakh, and the rate of interest is 8% per annum. Then, if INR 5 lakh is released during the first month from the total borrowed, your pre-EMI would be calculated on INR 5 lakh at the rate applicable for your loan. With each further disbursement made towards the loan, the amount increases accordingly, and so does your pre-EMI.

Pre-EMI Calculation Formula

The pre-EMI calculation formula is very simple. It is essentially a monthly computation of interest on this amount borrowed under disbursement tranches.

Pre EMI = (Disbursed Loan Amount × Interest Rate × 1/12)

Let us take an example:

• Amount of Loan Disbursed: INR 5,00,000
• Rate of Interest: 8% per annum
• Pre EMI = (5,00,000 × 8% × 1/12) = INR 3,333 per month

Therefore, during the first month, you would have to pay INR 3,333 this way as pre-EMI.

Also Read: Effective Strategies for Paying Off Your Home Loan Sooner

How to Calculate Pre-EMI for Home Loan?

To make the calculation easier, one can use a pre-EMI loan calculator or a home loan pre-EMI calculator. By using such a tool, borrowers can have an estimate of the interest portion being disbursed at the different periods within the loan lifecycle.

For computing-EMII in home loans, you should provide details like:

• Loan amount
• Interest rate
• Amount disbursed
• Disbursal schedule

Most banks and financial institutions have pre-EMI interest calculators in place on their websites, making it easier for customers to know what they owe before normal EMIs start.

Pre-EMI Charges

Many consider pre-EMI on loan as just another cost of borrowing from a bank. However, there is more than that to this. It is simply a charge for the interest you borrow money for, which should be paid monthly during the EMI period. It should be noted that this is not the principal amount being paid.

How much you pay depends on the following main factors: the lender of the loan, when and how much money is given to you, and the interest rate. It is always advisable to look at clauses in the loan agreement to understand them better.

Prepayment EMI Calculator

Most people with housing loans are often confused about the effect of prepayments on their pre-EMI. However, should you choose to either make a lump sum prepayment or part prepayment during this period, the total interest that you are supposed to pay will be reduced. If you are still not sure about how much you can save by using the same system and by making a lump sum payment then try prepayment EMI calculator.

On the one hand, prepayment EMI calculators are useful tools for estimating the resulting EMI changes after making an early payment. On the other hand, it helps in planning appropriately.

Things to Keep in Mind about Pre-EMI

Firstly, pre-EMI is not a permanent feature. It is only valid until the full amount of the loan is disbursed. Once you receive the whole loan amount, you will pay regular EMI, which includes principal and interest.

Secondly, not all home loans come with the pre-EMI option; mainly, construction-linked and partial disbursement will have them.

Thirdly, prepayment impacts pre-EMI in the sense that when you pay a portion of the loan EMI charges will be reduced. However, you should ask the lender if implementing prepayments alters the interest payment.

The Bottom Line

It is important to understand what pre-EMI means, especially for anyone planning to take a mortgage in India, where such loans are given out in tranches during construction or other periods of deferred disbursements.

Therefore, if you only want to pay the interest during this phase of the building, then use the home loan pre-emi calculator. Always consult with your lender on exact figures and terms surrounding this loan phase, known as pre-EMI.

Apply for a home loan now and learn more about your home loan repayments today!

FAQs

Q.1. How is pre-EMI calculated?

A. Pre-EMI is calculated using the following formula — Pre-EMI Interest = Loan Amount × Monthly Interest Rate.

Q.2. Which is better EMI or pre-EMI?

A. The EMI option is lighter on the pocket as you only pay interest in the first years before the EMI period starts. However, pre-EMI incurs a higher interest cost in the long term than the regular full EMI option.

Q.3. What is pre-EMI in education loans?

A. EMIs for educational loans can be broadly classified as the EMI paid during the loan disbursal or the EMI paid back after getting the loan. Pre-EMIs are the interest payments made for the education loan disbursed in parts.

Q.4. Can pre-EMI be converted to full EMI?

A. Yes, many lenders allow borrowers to switch from pre-EMI to full EMI, enabling faster repayment of the loan principal and reducing overall interest costs. However, this depends on the lender’s terms and conditions.

Q.5. What happens if I miss a pre-EMI payment?

A. Missing a pre-EMI payment can lead to late fees, penalties, and a negative impact on your credit score. It may also affect your loan repayment schedule and future eligibility for credit. It's advisable to stay on top of payments to avoid financial setbacks.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com.