For under construction properties, you can get an EMI or Pre-EMI loan :

• Pay larger amounts over a shorter period of time, less money in absolute terms in the end compared to a pre-EMI.

• You pay smaller amounts over a longer period of time, more money in absolute terms in the end compared to an EMI. You don’t have to pay the full EMI until the entire loan amount has been disbursed or until you take possession of the property. Where you have availed only a part of the loan, you pay only the interest on the amount disbursed. This interest is called pre-EMI interest (PEMI) and is payable monthly until the final.
• Disbursement is made and then the EMIs would commence.
• The borrower is not subject to the tax exemption on the pre-EMIs paid until the completion of the property.

• Let’s assume a loan has been sanctioned for Rs 80 lakhs but since it’s an under- construction project, demand from the builder will depend on the level of construction. Assuming the bank disbursed Rs 10 lakhs initially, then, the applicant has the option to pay the pre-EMI – the interest payable on Rs 10 lakhs as a loan amount – every month till the next disbursement happens and the interest gets added. So, the principal outstanding is not getting reduced till the time of possession. In such cases, the user is not burdened with a heavy EMI right away and since with time, his income will also increase, hence this is preferred by many customers who are exhausting their maximum eligibility. In the second method, the consumer will start paying the EMI considering a loan amount of Rs 80 lakhs even if the disbursement has happened for only Rs 10 lakhs (regular EMI). This way, the loan will close early and hence, the total cost of the loan will be less as compared to the pre-EMI method. This is preferred mainly by people who have sufficient monthly income to pay complete EMIs. Switching from Pre-EMI to EMI in the mid-term prior to possession- It is recommended to not wait till possession to start the EMI. In a situation where say, you have drawn up to 95% of the loan and the final 5% is payable on possession, but the project is delayed by 6 months, which is a common phenomenon in India, you land up paying Pre-EMI on almost the entire loan amount for 6 months, which is actually close to the EMI amount itself. Your acquisition cost shoots up and no repayment of the principal or reduction in the tenure happens! So, switching to EMI mode after drawing upto 70-75% of the loan amount is recommended. However, not all lenders allow that. You will need your adviser to structure this for you.

ROI – Your interest on loan consists of two parts. One is the Base Rate and another part is Spread Base rate – the minimum lending rate, below which banks can’t give you the loan. Spread – This is your final rate of interest after adding some % to the Base Rate. It is calculated based on the tenure risk, credit loss, profit requirement of bank, operating cost of the bank and risk assigned with individual customer. So each bank’s Base rate may be fixed for all customers. But remember that you may end up with either paying high interest rates or low, based on the spread bank charges to each individual. There is no cap on how much should be spread on and above the Base Rate.

Even though the RBI says the spread must be constant over the tenure of the loan but remember to check it whenever the raise in your loan EMI. You need to verify whether the raise in EMI is due to hike in Base Rate or Spread.