Home Loan EMI Mismatch: Understanding Interest-Only Instalments and How to Resolve Issues
Introduction
Recently, a reader inquired about a situation where they had paid their home loan Equated Monthly Instalment (EMI), but the principal amount was not deducted, and the entire home loan EMI was considered as interest by their bank. This article will explore the reasons behind such occurrences, the legality of this practice, and the steps to resolve it.
The Concept of Pre-EMI and Interest-Only Instalments
In the world of home loans, there's a subtle yet significant concept known as pre-EMI or interest-only monthly instalment. Let's delve into how this works.
When you purchase a property, the builder may demand payment in stages. At this early stage, the property might still be under construction, and the project may not yet be fully registered or completed. You have approached a bank for a loan that is sanctioned but not yet disbursed.
During this period, the bank inspects and ensures that you have made the required contributions such as the down payment, and all compulsory fees and charges. They also ensure that all necessary documents are provided and the agreement is registered.
During this pre-disbursement period, the bank disburses the payment directly to the builder. However, since the property is not fully complete, the bank does not initiate the regular EMI. Instead, they charge a pre-EMI, which solely pays the interest on the loan until the full formalities are complete.
When Does Regular EMI Begin?
After all formalities are completed, the bank starts the regular EMI, where a portion of each instalment goes towards principal repayment, and another portion towards interest repayment. If the entire EMI continues to be categorized as interest, it could imply an issue such as negative amortization.
Checking Your EMI Schedule
To verify whether your EMI payments are being allocated correctly, you should:
Review your loan agreement to understand the terms and conditions of your EMI payments.
Check your bank statement for the EMI summary to ensure both principal and interest are deducted.
Request your home loan EMI schedule from your bank to see the detailed breakdown of each instalment.
For the first few months, the EMI payments deducted will primarily reduce the interest portion, while the principal reduction will only start after a certain period.
How to Resolve Unfair Treatment
If you find that your EMI payments are being unfairly categorized, follow these steps:
First, contact your bank immediately and discuss the issue. Request a detailed account of your payments and verify the EMI schedule.
Write a formal complaint to the branch manager, Grievance Redressal Officer (GRO), or the regulatory body if necessary.
Document all your communications and maintain a record of any correspondence or discussions.
Banks typically have a process in place to review older loan accounts for interest payment discrepancies. This process helps identify and rectify any errors.
Conclusion
Although it can be legally and fair for the bank to categorize your EMI sole as interest for a period, this situation should be reviewed and resolved to ensure correct principal deductions. Always keep a close eye on your EMI payments and communicate with your bank if you notice any anomalies.
Keywords: home loan EMI, negative amortization, pre-EMI, interest-only instalments