Buying Under-Construction Home? Know Benefits Of ADF And Pre-EMI

Anita Agarwal, 32, finalised an under-construction property worth Rs 40 lakh. She availed of a loan worth Rs 30 lakh from a public-sector bank at 10.50 per cent interest rate for 20 years. While Agarwal calculated her equated monthly instalment (EMI) at Rs 29,951, her bank told her about two options that she could choose from — advance disbursement facility (ADF) and Pre-EMI. Agarwal hesitated because she had not heard these banking jargons before.

Here's a look at the two facilities to help you understand the benefits better:

The advance disbursement facility

Under an ADF facility, a bank disburses the entire loan amount to your developer immediately. This means your EMI on the entire amount (Rs 29,951 as in Agarwal's case), will start immediately. Agarwal will have to pay this amount for 20 years, starting from the current month.

Pre-EMI

Under a pre-EMI scheme, the loan amount is disbursed on the basis of the project construction stage, as stated in the agreement between the bank and the developer. This agreement might specify that, say, 25 per cent of the loan amount sanctioned will be disbursed after the completion of first four floors of the project and another 25 per cent after the completion of the next four floors, and so on.

If she opts for this plan, Agarwal will have to pay the interest amount on partial disbursements, over the construction period of two years. As soon as the final disbursement is made to the developer, the EMI payment will start. In simple words, Agarwal will be paying only the interest amount for two years and not the principal; she will have to pay EMI of Rs 29,951 after this period.
Under the pre-EMI plan, you pay interest for the construction period, plus the EMI for the entire loan tenure, while under ADF you serve just the EMI for the entire tenure of the home loan .

Comparing the two

In a pre-EMI scheme, you pay the interest portion for the period during which the property remains under-construction. If the construction gets delayed, you have to pay the interest for a longer period. In ADF, any delay in construction does not affect the applicant. 

Which one to go for?

You must go for a pre-EMI arrangement only if you have fund constraints. Apart from being costly, this option also provides you no tax benefits till the time the property remains under-construction.

On the other hand, ADF works well in the favour of developers. The reason: the amount you were supposed to pay to him during the period of construction is paid on the first day itself. Plus, you start paying the EMI on this amount.

This is the reason why so many builders offer discounts on property cost or are ready to reimburse the Pre-EMI interest, so that they can get the full disbursed loan amount on day one.