After the loan has been sanctioned and approved, the final stage is disbursal. When a Home Loan is obtained on a property that is still under construction, the whole loan amount is not given to the builder at the same time. Instead, payments are made in installments based on the builder's completion of the various stages of development.
During this stage, the borrower is only required to pay an interest sum known as the Pre-EMI, rather than the full EMI (Principle + Interest) on the sanctioned loan amount. The Pre-EMI is interest computed only on the amount paid to the builder, according to the stage of construction.
Let's look at an example to better grasp what a Pre-EMI is: If you have a debt of Rs 60 lakh at an interest rate of 8% per annum, If your bank only gives the builder Rs 6 lakh at the commencement of construction, your pre-EMI will be computed as interest on the Rs63 3 lakh, or Rs 4,000 per month. As the project advances, more money are given, and the Pre-EMI rises in tandem. For example, if the builder receives an additional Rs 6 lakh after 6 months, the Pre-EMI will rise to Rs 8,000/month.
Unlike the Pre-EMI, the EMI you'll pay will include both the principal and the interest. The whole sanctioned loan amount is released to the builder once the project has been built. Now your actual EMI cycle begins, and the principal balance of your repayment begins to decrease.
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