What are Tranche Disbursement and Tranche EMI in Home Loans?

When purchasing an under-construction property, the Home Loan disbursement process often involves tranche disbursement. This method offers a flexible approach to loan disbursement and repayment, allowing you to manage you finances more efficiently during the construction phase.  

Read further to explore what tranche disbursement means, how tranche-based EMI works, and the benefits of opting for this repayment method in a Home Loan. 

What is Tranche Disbursement in Home Loans? 

Tranche disbursement refers to the process where the Home Loan amount is released in instalments or "tranches" rather than a lump sum. This method is typically used when financing under-construction properties where the builder requires payments at various stages of construction. 

For example, if a borrower is approved for a loan of Rs.50 Lakh, the lender may disburse Rs.10 lakh initially and the remaining amount in subsequent tranches as per the construction progress. This phased disbursement aligns with the builder's demand for funds and ensures that the borrower only pays interest on the disbursed amount. 

What is Tranche EMI in a Home Loan? 

A tranche EMI is an amount that a borrower pays based on the amount disbursed during each tranche of the Home Loan. Unlike regular EMIs, which are calculated on the entire loan amount from the start, tranche EMIs are charged only on the disbursed amount until the full loan is released. 

During the construction phase, borrowers usually pay pre-EMI, which covers only the interest on the disbursed tranches. Once the entire loan amount is disbursed, the full EMI begins, covering both the principal and interest components. 

Why Are Home Loan Disbursements Done in Tranches?

Home Loan disbursements are made in tranches for several practical reasons: 

• Payments are made based on the builder’s demand at each stage of construction 
• You have to pay interest only on the disbursed amount 
• Allows you to manage your finances better by reducing EMI outflow until the property is ready for possession 
• Ensures that funds are released progressively as the property construction progresses, thereby reducing the risk of stalled projects 

How Does Tranche-Based EMI Work?

The tranche-based EMI system works as follows: 

1. Initial Disbursement: The lender disburses a portion of the loan to the builder. The borrower pays pre-EMI, which includes only the interest on the disbursed amount. 
2. Subsequent Tranches: As construction progresses, more funds are disbursed, increasing the pre-EMI amount. 
3. Full Disbursement: Once the total loan is disbursed, the borrower starts paying the full EMI, which includes both principal and interest repayment. 

How to Calculate Tranche EMI?

To calculate the tranche EMI, you need to consider: 

• Interest Rate: The rate applied by the lender on the disbursed amount 
• Disbursed Amount: Only the amount disbursed by the lender, not the total loan sanctioned 
• Remaining Loan Tenor: The duration left for loan repayment 

Key Considerations for Tranche-Based Home Loans in India

Before opting for a tranche-based Home Loan, consider the following: 

• Construction Timeline: Ensure the builder’s schedule is aligned with the loan disbursement plan 
• Pre-EMI Impact: Pre-EMIs do not reduce the principal amount. Switching to full EMI early can help lower the principal faster  
• Lender’s Policies: Review the terms related to tranche disbursement, including fees, interest rates, and flexibility in EMI payments  

Tranche disbursement in Home Loans offers a strategic advantage for borrowers investing in under-construction properties. It provides the flexibility to manage cash flow and reduces the interest outgo during the construction phase. Before opting for this facility, evaluate the construction timeline, financial readiness, and lender policies to maximise the benefits.