Sucheta Dalal :Home loans: Hidden discount
Sucheta Dalal

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Home loans: Hidden discount  

April 13, 2011

Builders are offering to pay for pre-EMIs. But is this worthwhile for you?

N Madhavan

Experts believe that real-estate prices have escalated so sharply within such a short period that pressure for a correction is increasing. There is a counter view that builders will not lower prices as input costs have increased significantly. However, sales have dwindled in expensive areas like south Mumbai. Secondly, some builders are quietly waiving the payment of what is called ‘pre-EMIs’ (equated monthly instalments) as part of their promotional efforts which is one way of saying that prices are coming down. The builder will agree to pay the pre-EMIs to housing loan companies. With sales of flats decreasing, many builders such as Manjeera Constructions, Indu Projects, Aliens Group and Parsvnath Developers are offering such schemes to boost sales.

How does this work and should this be a consideration while buying or taking a loan to buy a home?

When an individual takes a housing loan, s/he has to repay the loan in EMIs over a period of, say, 15 years. If the borrower goes in for the option of an advance disbursal facility (ADF), the entire loan amount will be disbursed to the builder, and the borrower will have to start paying the EMIs immediately. This is even before the construction is complete and the borrower takes possession of the house.

If the borrower takes the pre-EMI option (a more conservative approach), the loan will be disbursed in tranches, based on the builder’s progress in completion of the project. The pre-EMI payments will be during the period of land development and construction by the builder. The disbursement will be complete by the time the borrower takes possession of the home.

During this period, the borrower must pay pre-EMIs, i.e., simple interest on the total amount disbursed to the builder. This will continue on a monthly basis until the actual EMIs become applicable, i.e., when the borrower takes possession of the home. The rate of interest used in calculating the pre-EMI may vary from bank to bank.

Once the regular EMI payments begin, the borrower will be eligible for tax deduction on the pre-EMIs paid up to a period of five years in equal proportions. If the construction of the property is not complete by 31st March of a financial year, then no benefit is available for that financial year.

When the borrower makes tranche payments during the period of pre-EMIs towards the principal amount borrowed, the principal outstanding will be reduced by the housing loan company. But there will be no tax benefit on these tranche payments. Only when the EMI payments begin, will the borrower benefit on the principal component of the EMI.

It is always better to buy a house with a pre-EMI option. But the decision about how much to pay for an apartment must be based on many considerations, especially how much you can really borrow.

Remember, a builder’s offer to waive a few pre-EMIs does not mean much of a discount. It is far better to bargain for a discount in the apartment value itself and reject the ‘generous’ offer of the builder to waive a few pre-EMIs. 

-- Sucheta Dalal