It can be quite challenging buying a second home, especially if you are still servicing a loan for the first. We list a few questions you need to ask yourself before taking the plunge.
Buying property in India is considered to be one of the best investment decisions one can make. Property normally appreciates in value, and it is quite liquid in terms of raising funds against it in times of financial need.
But after buying your first home a few years ago while borrowing a home loan to do so, you now chance upon a second house that you wish to buy. You are aware that your desire for the second house puts you in a precarious financial situation. And yet, your heart is set on the house and you decide to take another home loan to pay for it.
There are some important questions that you need to ask yourself before going through with the second home buy. Ask yourself these questions :
Q: Is this a good time to buy the second house ?
Every year, there is a slight dip or a plateau in realty prices when experts advise people to buy property. It happens during times of low demand and high supply, as also when there is economic deflation. Keep track of the market forces and whether they have an appreciable effect on the realty prices. When you realise that prices have dropped even slightly, it becomes a good time to buy a second home. However, if you are uncertain about how to raise the finances for the second home buy, or if you need to sell the first house to buy the second one, then you may need to take a step back and answer these doubts before taking the plunge.
Q: Do you know your housing loan eligibility ?
You are already familiar with the term ‘housing loan eligibility’ since you are already a home owner and who may have taken a home loan for your first house. However, housing loan eligibility changes quite a lot the second time around – now that you are already servicing one home loan (and may have other debts as well, like credit card/vehicle/personal loan), the bank will calculate your eligibility on the basis of these parameters. If your housing loan eligibility is lower than you expected, you may have to shell out the funds for the second home purchase from your private resources, or take loans from friends and family as well. If your first home loan is already repaid, you can get a mortgage home loan in India against the first property to finance the purchase of the second. Also remember that you may be charged a higher rate of interest if you have many outstanding liabilities.
Q: Do you know if you get tax benefits on the second home purchase ?
Most home buyers are under the (mistaken) assumption that every home loan in India gets the same amount of tax benefits. However, you will realise after studying the current tax laws that you may get almost no tax benefits on your second home buy. Prevalent tax laws grant tax breaks on only one owned property. The Government considers that only one of your own properties is self-occupied, while the remaining properties are being used to get rental income for you. If you have indeed rented out your other property, then that rental income is taxed as per prevailing tax norms. Thus, there is no tax benefit even on taking a loan to buy the second home.
Q: Have you considered that the second home loan may stretch your finances even further?
As a home owner that has already gone through the rigours of borrowing a home loan in India, you are aware of the tightrope walk that budget management becomes with EMIs to pay every month. There will be a greater EMI outgo per month when you take a second home loan. Do consider this factor when you apply for a second loan – your budget is going to be stretched to its limit once the EMI cycle begins. You will need to reassess your finances, and come up with an alternative expense plan to meet the monthly living costs. You will also have to come up with a plan to keep your savings on track now that your income is going to be pulled in more directions than before.
Q: Have you considered if the second house will give you a good ROI?
Though the realty market is booming in many places in the country, some cities and localities have already reached their peak point in terms of saleability. So when you purchase a house in a locality that is already choc-a-block with residential towers and with little scope for future development, then there is a question mark over how much your house will sell for in the future. In fact, this factor can even put your decision to buy a second home in doubt. Do go ahead with the purchase if the house is certain of appreciating in price every year. You may not even sell it in the future, but it helps to know that you own an asset that is appreciating well for the future.