Understanding EMI for Construction Linked Plans
Home loans can often involve complex calculations, particularly when it comes to properties under construction. One of the payment structures you may encounter is the Construction Linked Plan, where the Equated Monthly Installment (EMI) is linked directly to the construction milestones. Here’s a detailed guide on how to calculate the EMI for such plans.
What is a Construction Linked Plan?
In a Construction Linked Plan, the disbursal of funds is tied to specific stages of construction as defined by the lender. Instead of receiving the entire loan amount at once, the builder receives funds in tranches based on the progress of the project. This approach allows buyers to only start repaying EMIs once the loan amount is disbursed.
How is EMI Calculated for a Construction Linked Plan?
To calculate the EMI under a Construction Linked Plan, it is essential to understand how it is structured. Here’s a step-by-step breakdown of the process:
Step 1: Determine the Loan Amount
Assess the total loan amount you are eligible for based on your income, current financial obligations, and the property value. Most lenders provide loans ranging from 80% to 90% of the property’s market value.
Step 2: Understand the Interest Rate
Identify the applicable interest rate, which can vary based on the lender and your credit profile. This rate is typically annual and needs to be converted to a monthly figure for EMI calculations. For example, if your interest rate is 10% per annum, you would divide it by 12 to find the monthly rate (0.10 / 12 = 0.00833).
Step 3: Identify the Tenure
Determine the loan tenure, usually expressed in months. Common tenures range from 10 to 30 years, depending on your agreement with the lender.
Step 4: Calculate EMI Using the Formula
The formula to calculate EMI is as follows:
\[
EMI = P \times r \times \frac{(1 + r)^n}{((1 + r)^n – 1)}
\]
Where:
– \(E\) is the EMI
– \(P\) is the principal loan amount
– \(r\) is the monthly interest rate
– \(n\) is the total number of monthly installments
Input the values corresponding to your loan amount, monthly interest rate, and tenure to compute the EMI.
Step 5: Adjusting for Disbursed Amount
Since the funds are disbursed in phases, your EMI will initially be lower than the maximum calculation based on the total loan amount. You will pay interest only on the amount disbursed to the builder. As construction progresses, the loan amount increases, leading to higher EMIs over time until the loan is fully disbursed.
Step 6: Monitor Payment Triggers
Stay in touch with your lender and the builder to monitor the construction process. Each time a construction milestone is achieved, a portion of the loan will be disbursed, which will subsequently affect your EMI. Keep track of how these payments align with the project timelines.
Can You Pay Full EMI for Under Construction Property?
It’s essential to clarify whether your lender permits you to pay the full EMI amount before construction completion. Some institutions may require the complete proportion of the loan amount to incur EMIs from the onset, whereas others might allow you to begin payments only once certain construction phases are reached. Confirm these details with your lender upfront.
Frequently Asked Questions (FAQ)
1. What happens if I choose to accelerate payments?
If you choose to make higher payments or prepay your loan, you could reduce the total interest paid over the tenure. Ensure to check if there are any prepayment penalties from your lender.
2. Are tax benefits available during the construction phase?
Tax benefits for home loans are generally available only once the construction is complete. However, you can still claim deductions on interest paid during the construction period under certain provisions, subject to limits set by the tax authorities.
3. How can I manage fluctuating EMIs during construction?
To manage fluctuating EMIs, it is advisable to maintain a separate budget for loan repayments considering the gradual increase in payments. Keeping a buffer in your finances for increased EMIs can also help accommodate any financial shocks. Additionally, discussing fixed-rate options with your lender can provide more stability.
