GAUTAM, a 32-year-old IT professional, ultimately decided to own a flat, which had been his and his wife’s dream from the day they got married. Very meticulously, he started exploring builder projects to locate a flat which fits his budget and meets his wife’s expectations. From the numerous projects visited, Gautam shortlisted two flats — one in Sparkling Heights and the other in City View. The flat in Sparkling Heights was ready to move in but the flat in City View was under construction and was available on construction-linked payment option.

Gautam was in a dilemma as to which option would be ideal for him. If he opted for the ready to move in flat, he would have had to start EMI (payment of interest and principal together) immediately, which he was not really financially prepared for. The advantage of buying a flat in City View was proximity to his office and kids’ school. He started showing interest in the under-construction project. This is where the concept of pre EMI (PEMI) came in for Gautam.

His friend Vikas, a senior credit manager with a housing finance company, clarified the PEMI concept in detail. In CLP, he would get the loan disbursement in tranches out of his sanctioned loan and the EMIs of the loan would not commence till the full disbursement of the loan happens. Gautam would have to keep paying the interest only for the intervening period for which the loan was partly disbursed.

Giving his expert comments on the payment schedule for flat in City View, he introduced Gautam to the pros and cons of paying PEMIs for the loan. The cost of a flat in City View was Rs 40 lakh and Vikash calculated that around Rs 34 lakh loan (85% of the property value) would be sanctioned by the housing finance company. Gautam would have to pay the balance amount of Rs 6 lakh from his savings.

If he availed the loan on CLP, he would have to make PEMI payments, which is only the interest on the amount disbursed. The disbursement is made by the financier according to the progress of the project. Gautam, clearly understood one major point — i.e. since the builder will be paid as per the work progress, there will be a constant pressure on the builder to deliver on time. He knew that as an individual he would have little control over his dream project.

ADVANTAGES OF Pre EMIS:

Gautam realised that PEMIs allows him the time to finance a property without losing out on dream flat he had selected for his family.

• Disbursement of sanctioned loan based over a period of time has an in-built advantage as payment is usually made based on progress of work. Gautam is not bound to pay unless the stage as per agreed terms is completed. In turn, the builder will try to give timely possession of the flat.

• Gautam also realised that he can at least see what kind of material is being used by the builder when he visits the project every fortnight

• Another advantage that Gautam discovered was that only interest was required to be paid, that too on the disbursed amount. And as per his calculation, by the time the whole EMI is payable he would get at least two increments (if not one promotion, which however he is not sure of at this time of financial meltdown) making his financial state a little comfortable.

DISADVANTAGES OF Pre EMIS:

Vikas also pointed out that PEMI option has following disadvantages which Gautam must be aware of:

• As per the calculation, Gautam would have to pay interest for 24 months and the total payment would be of around Rs 3.60 lakh, which would be additional interest payment (assuming rate of interest is 10% and quarterly disbursement of loan as per construction progress) since the EMIs will commence only when full disbursement takes place in two years.

• It also means that Gautam would have to pay interest along with his rent, which is currently Rs 15,000 pm and will increase at least 5% pa, in the two years. So his monthly outgo will increase during these two years

• Gautam knew the Income tax-implication as well — until he was given possession he couldn’t have claimed tax rebate under various section of I-T Act, 1961; neither against payment of interest nor against principal which he would only start paying once EMIs begin.

• The CLP-based payment plan monitors the progress of construction of project but the same is not true for the cases where the payment is time linked and not construction linked. In such cases, the builder raises the demand on the basis of due dates as specified in the payment plan, irrespective of stage of construction of the project. Vikas cautioned Gautam about such project for obvious reasons.